Christi, Inc., is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Christi€™s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the 2-year life of the skateboards follow. Also shown are the cost allocation rates for each activity.

Requirements
1. Calculate the predicted quality cost savings from the design engineering work.
2. Christi spent $103,000 on design engineering for the new skateboard. What is the net benefit of this €œpreventive€ quality activity?
3. What major difficulty would Christi€™s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure qualityimprovement?

Transcribed Image Text:

Predicted Activity Cost Allocation Rate Per Unit Reduction in Activity Activity Units Inspection of incoming materials Inspection of finished goods. 420 $ 37 420 26 Number of defective units discovered in-house 1,400 56 Number of defcctive units discovered by customers 325 75 Lost sales to dissatisfied customers 150 103