Safe Rider produces car seats for children from newborn to two years old. The company is worried
Question:
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.
REQUIRED
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?
Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes... Opportunity Cost
Opportunity cost is the profit lost when one alternative is selected over another. The Opportunity Cost refers to the expected returns from the second best alternative use of resources that are foregone due to the scarcity of resources such as land,...
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Related Book For
Cost Accounting A Managerial Emphasis
ISBN: 978-0133392883
6th Canadian edition
Authors: Horngren, Srikant Datar, George Foster, Madhav Rajan, Christ
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