Outdoor Gear Co. produces harnesses for mountain climbing activities. The company is concerned about a competitor that has recently come under public scrutiny because of product failure. Historically, Ourdoor Gear Co.’s only problem with its climbing harness 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 harness and the stitching repair cost is $1 per harness.
Last year all 100,000 harnesses produced and sold were inspected and 5% were found to have problems with the stitching in the harness straps during the inspection. Another 2% of the 100,000 harnesses had problems with the stitching but the internal inspection did not discover those problems. These defective units were sold and shipped to customers. Upon discovery of the defective harness the defects were shipped back to Outdoor Gear and repaired. Outdoor Gear incurs the out-of-pocket costs of shipping costs are $10 per unit and repair costs are $1 per unit.
Outdoor Gear’s management accountant estimates that of the defective units shipped back to Outdoor Gear, 20% of these defective harnesses will result in negative word of mouth, loss of sales, and lowering of next year’s sales by $500 for each of the 20% of defective units.
Required – show all of your calculations to support your answers to ALL questions:
1. Calculate appraisal cost.
2. Calculate internal failure cost.
3. Calculate the out-of-pocket costs of external failure.
4. Calculate the opportunity costs of external failure.
5. Calculate Outdoor Gear’s total cost of quality, including opportunity costs.
6. Outdoor Gear is concerned with the high up-front cost of inspecting all units produced and sold. Management is considering an alternative internal inspection method that will cost $1.50 per harness inspected. All units produced and sold would still be inspected under the new method. The estimate is that the new inspection method will internally detect 2.5% of total units with stitching problems. Another 4.5% of total units with stitching problems will not be detected and will be shipped to customers. If all other costs of quality stay the same, calculate the total cost of quality, including opportunity costs under the new inspection method.
7. Based on the cost of quality analysis you completed, do you recommend Outdoor Gear implement the new inspection method? Why or why not?
8. Identify two important recommendations you would make to management to improve Outdoor Gear’s product quality. Your recommendations should include strategic implications.
Comments
Post a Comment