When the quality costs for Year 3 were ready, John was disappointed with the outcome. The total quality costs have increased in Year 2 and finally, in Year 3 the company was back to square zero, spending $ 2,700 in quality costs. Paul was supportive of Ringo's decisions and argued that quality is a long-term investment as it takes time to reap its benefits.

Required

a) Explain John and Paul's differing points of view of quality costs.

b) Explain what is expected to happen in Year 4 if (i) Fridges-R-Fun keeps following Ringo's decision and if (ii) Fridges-R-Fun cancels the activities Ringo has implemented.

After the changes implemented on the costs of quality presented in Question 2, Ringo wants to implement value-based pricing for Fridges-R-Fun products. As a consequence, the price of fridges would become customised to different customers based on criteria such as geographic location. Currently, Fridges-R-Fun uses cost-plus pricing for setting the prices of its products, as discussed by Dholakia (2018).1

Required

a) List and explain three limitations of using cost-plus pricing, as discussed by Dholakia (2018).

b) Explain how value-based pricing would benefit from the costs of quality changes implemented by Ringo, as discussed in Question 2.

e) Considering the industry benchmark for the overhead for assembly is 75% of direct labour cost, identify whether this specific job has an overhead for assembly lower or higher than a job using the industry benchmark. Briefly explain what could cause a difference between this specific job and the industry benchmark for the assembly overhead cost.