Question: Teensy Toys is using a costs of quality approach to

Teensy Toys is using a costs of quality approach to evaluate design engineering efforts for a new toy robot. The company’s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in active ties over the two-year life of the toy robot follow. Also shown are the cost allocation rates for each activity.
1. Calculate the predicted quality cost savings from the design engineering work.
2. Teensy Toys spent $75,000 on design engineering for the new toy robot. What is the net benefit of this “preventive” quality activity?
3. What major difficulty would Teensy Toys’ managers have had in implementing this costs of quality approach? What alternative approach could they use to measure quality improvement?
Axis Systems specializes in servers for work-group, ecommerce, and ERP applications. The company’s original job cost system has two direct cost categories: direct materials and direct labour.
Overhead is allocated to jobs at the single rate of $22 per direct labour hour.
A task force headed by Axis’s CFO recently designed an ABC system with four activities. The
ABC system retains the current system’s two direct cost categories. Thus, it budgets only overhead costs for each activity. Pertinent data follow:
1. Compute the product cost per unit for each job using the original costing system (with two direct cost categories and a single overhead allocation rate).
2. Suppose Axis Systems adopts the ABC system. Compute the product cost per unit for each job using ABC.
3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
4. A dependable company has offered to produce both jobs for Axis for $5,400 per output unit. Axis may outsource (buy from the outside company) Job A only, Job B only, or both jobs. Which course of action will Axis’s managers take if they base their decision on (a) the original system? (b) ABC system costs? Which course of action will yield more income?

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