Hartigay Manufacturing is evaluating its quality control costs for 2010 and preparing the budget for 2011. Quality costs incurred at the company for 2010 are as follows:
Prevention costs ......... $ 450,000
Appraisal costs ........ 150,000
Internal failure costs ...... 525,000
External failure costs ...... 150,000
Total .............$1,275,000
Prepare a memo to the company president on the following issues:
a. Which categories of quality costs would be affected by the decision to spend $2,250,000 on new computer chip-making equipment that would replace older equipment? Why?
b. If projected external failure costs for 2011 can be reduced 60 percent (relative to 2010 levels) by spending either $75,000 more on appraisal or $120,000 more on prevention, why might the firm opt to spend the $120,000 on prevention rather than the $75,000 on appraisal?