Safe Travel produces car seats for children from newborn to 2 years old. The company is worried because one of its competitors has recently come under public scrutiny because of product failure. Historically, Safe Travel's only problem with its car seats was stitching in the straps. The problem can usually be detected and repaired during an internal inspection. The cost of the inspection is $5 per seat and the repair cost is $1.00 per seat. All 200,000 car seats were inspected last year and 5% were found to have problems with stitching in the straps during the internal inspection. Another 1% of the 200,000 car seats had problems with the stitching, but the internal inspection did not discover them. Defective units that were sold and shipped to customers needed to be shipped back to Safe Travel and repaired. Shipping costs are $8 per car seat and repair costs are $1.00 per car seat. However, the out of pocket costs (shipping and repair) are not the only costs of defects not discovered in the internal inspection. Negative publicity will result in a loss of contribution margin of $100 for each external failure.

Required: Calculate the appraisal cost, internal failure cost and out of pocket external failure cost.

Determine the opportunity cost associated with the external failures

What are the Total Costs of Quality in dollars?

Safe Travel is concerned with the high upfront cost of inspecting all 200,000 units. It is considering an alternative inspection plan that will cost only $3.00 per car seat inspected. During the internal inspection, this alternative technique will detect only 3.5% of the 200,000 car seats that have stitching problems. The other 2.5% will be detected after the car seats are sold and shipped. What are the total costs of quality for the alternative technique?

Refer to information in Problem 2 in answering this question.

Safe Travel has discovered a more serious problem with the plastic core of its car seats. An accident can cause the plastic in some of the seats to crack and break, resulting in serious injuries to the occupant. It is estimated that this problem will affect about 200 car seats in the next year. This problem could be corrected by using a higher quality of plastic that would increase the cost of every car seat produced by $10. If this problem is not corrected, Safe Travel estimates that out of the 200 car seats affected, customers will realize that the problem is due to a defect in the seats in only 3 cases. Safe Travels legal team has estimated that each of these 3 cases would result in a lawsuit that could be settled for about $500,000. All lawsuits settled would include a confidentiality clause, so Safe Travels reputation would not be affected.

Answer the following questions:

1. Assuming that Safe Travel expects to sell 200,000 car seats next year, what would be the cost of increasing the quality of all 200,000 car seats?

2. What will be the total cost of the lawsuits next year if the problem is not corrected?

3. Suppose Safe Travel has decided not to increase the quality of the plastic because the cost of increasing the quality exceeds the benefits (saving the cost of lawsuits). What do you think of this decision? (Note: Because of the confidentiality clause, the decision will have no effect on Safe Travels reputation.)

4. Are there any other costs or benefits that Safe Travel should consider?