Question

Cell Design produces cell phone covers for all makes and models of cell phones. Cell Design sells 1,050,000 units each year at a price of $ 10 per unit and a contribution margin of 40%. A survey of Cell Design customers over the past 12 months indicates that customers were very satisfied with the products but a disturbing number of customers were disappointed because the products they purchased did not fit their phones. They then had to hassle with returns and replacements. Cell Design’s managers want to modify their production processes to develop products that more closely match Cell Design’s specifications because the quality control in place to prevent ill-fitting products from reaching customers is not working very well.
The current costs of quality are as follows:
Prevention costs ...................... $ 210,000
Appraisal costs ..................... $ 100,000
Internal failure costs
Rework .......................... $ 420,000
Scrap .......................... $ 21,000
External failure costs
Product replacements ................... $ 315,000
Lost sales from customer returns .............. $ 787,500
The QC manager and controller have forecast the following
additional costs to modify the production process.
CAD design improvement ................. $ 150,000
Improve machine calibration to specifications .......... $ 137,500

Required
1. Which cost of quality category are managers focusing on? Why?
2. If the improvements result in a 60% decrease in customer replacement cost and a 70% decrease in customer returns, what is the impact on the overall COQ and the company’s operating income? What should Cell Design do? Explain.
3. Calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs and as a percentage of sales before and after the change in the production process. Comment briefly on your results.



$1.99
Sales6
Views398
Comments0
  • CreatedMay 14, 2014
  • Files Included
Post your question
5000