Nabors Company had actual quality costs for the year ended June 30, 2013, as given below.
Prevention costs:
Prototype inspection .................. $ 300,000
Vendor certification ..................... 600,000
Total prevention costs ................. $ 900,000
Appraisal costs:
Process acceptance ...................... 315,000
Test labor ................................. 360,000
Total appraisal costs .................. $ 675,000
Internal failure costs:
Retesting ................................ $ 187,500
Rework .................................... 375,000
Total internal failure costs ............ $ 562,500
External failure costs:
Recalls ................................... $ 243,750
Product liability .......................... 618,750
Total external failure costs ........... $ 862,500
Total quality costs .................... $3,000,000
At the zero-defect state, Nabors expects to spend $375,000 on quality engineering, $75,000 on vendor certification, and $50,000 on packaging inspection. Assume sales to be $25,000,000.
Required:
1. Prepare a long-range performance report for 2013. What does this report tell the management of Nabors?
2. Explain why quality costs still are present for the zero-defect state.
3. What if Nabors achieves the zero-defect state reflected in the report? What are some of the implications of this achievement?