Costs of quality (CMA, adapted) Costen, Inc., produces cell phone equipment. Jessica Tolmy, Costen’s president, decided to devote more resources to the improvement of product quality after learning that her company had been ranked fourth in product quality in a 2006 survey of cell phone users. Costen’s quality-improvement program has now been in operation for two years, and the cost report shown here has recently been issued.

1. For each period, calculate the ratio of each COG category to revenues and to total quality costs.

2. Based on the results of requirement 1, would you conclude that Costen’s quality program has beer successful? Prepare a short report to present your case.

3. Based on the 2008 survey, Jessica Tolmy believed that Costen had to improve product quality. In making her case to Costen management, how might Tolmy have estimated the opportunity cost of not implementing the quality-improvement program?

Transcribed Image Text:

Semi-annual COQ report, Costen, Inc. (In thousands) 6/30/2009 12/31/2009 6/30/2010 12/31/2010 Prevention costs $ 440 $ 390 $ 330 $ 440 Machine maintenance Supplier training Design reviews Total prevention costs Appraisal costs Incoming inspections Final testing Total appraisal costs Internal failure costs 20 50 40 100 214 50 210 650 200 510 754 570 90 63 108 123 293 383 203 266 332 332 440 455 202 112 Rework 231 165 Scrap Total internal failure costs 124 116 71 236 67 179 355 318 External failure costs Warranty repairs Customer returns 72 68 165 85 570 735 $2,040 547 632 $2,159 264 336 $1,605 188 256 $1,271 Total external failure costs Total quality costs Total revenues $9,020 $8,240 $9,080 $9,300