Safe Rider produces car seats for children from newborn to two years old. The company is worried because one of its competitors has recently come under public scrutiny because of product failure. Historically, Safe Rider’s only problem with its car seats was stitching in the straps. The problem can usually be detected and repaired during an internal inspection. The cost of the inspection is $5, and the repair cost is $1. All 100,000 car seats were inspected last year and 5% were found to have problems with the stitching in the straps during the internal inspection. Another 2% of the 100,000 car seats had problems with the stitching, but the internal inspection did not discover them.
Defective units that were sold and shipped to customers needed to be shipped back to Safe Rider and repaired. Shipping costs are $10, and repair costs are $1. However, the out-of pocket costs (shipping and repair) are not the only costs of defects not discovered in the internal inspection. For 20% of the external failures, negative word of mouth will result in a loss of sales, lowering the following year’s contribution margin by $500 for each of the 20% of units with external failures.
1. Calculate appraisal cost.
2. Calculate internal failure cost.
3. Calculate out-of-pocket external failure cost.
4. Determine the opportunity cost associated with the external failures.
5. What are the total costs of quality?
6. Safe Rider is concerned with the high up-front cost of inspecting all 100,000 units. It is considering an alternative internal inspection plan that will cost only $1.50 per car seat inspected. During the internal inspection, the alternative technique will detect only 2.5% of the 100,000 car seats that have stitching problems. The other 4.5% will be detected after the car seats are sold and shipped. What are the total costs of quality for the alternative technique?
7. What factors other than cost should Safe Rider consider before changing inspection techniques?