Question: The Stowbridge Division is analyzing expanding its Total Quality Management

The Stowbridge Division is analyzing expanding its Total Quality Management program. It already has a TQM program in place. However, one of its customers, Amlan Equipment, is asking all sup-pliers to become ISO 9000– qualified, a process that certifies that the firm meets various standards. Once suppliers are ISO 9000– qualified, Amlan can reduce its inspection costs. Not all of the suppliers will be certified, and those that are will receive more business from Amlan.
Amlan purchases a stainless steel rotor from Stowbridge. After earning ISO 9000 certification, Stowbridge estimates that it will have to incur the following annual incremental costs as long as it wants to maintain its certification:
Annual Incremental Costs to be ISO 9000– Certified
Training............ $ 74,000
Inspection............ $ 96,000
Prevention ............ $ 62,000
Direct materials.......... 10%
Direct labor............ 15%
To manufacture the current quality of the rotors (before ISO 9000 certification), the budgeted selling price and standard cost data per rotor follow.
Selling price.............. $ 14.00
Less standard costs:
Direct materials.......... $ 4.30
Direct labor 2.40
Manufacturing overhead (all fixed)... 2.05
Selling and administrative (all variable). 1.60
Unit cost $ 10.35 Unit profit ..... $ 3.65
Unless Stowbridge receives ISO 9000 certification, it will lose Amlan’s business of 120,000 units per year. Management estimates that the higher quality of the rotor that meets quality criteria will allow Stowbridge to add 14,000 rotors to its existing sales from new and continuing customers. Stowbridge is currently selling 480,000 rotors per year, including the Amlan sales. The 480,000 current sales amount to 63 percent of plant capacity. The additional 14,000 units sold can be manufactured without exceeding plant capacity. The higher- quality process after ISO 9000 certification is received would apply to all the rotors produced.

Should Stowbridge seek ISO 9000 certification? Support your recommendation with an analysis of the costs and benefits ofcertification.

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  • CreatedDecember 15, 2014
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