Question: Lilly Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Lillys senior managers expect the engineering work to reduce

Lilly Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Lilly€™s senior managers expect the engineering work to reduce appraisal, internal failure, and external failure activities. The predicted reductions in activities over the two-year life of the skateboards follow. Also shown are the predetermined overhead allocation rates for each activity.

Requirements
1. Calculate the predicted quality cost savings from the design engineering work.
2. Lilly spent $100,000 on design engineering for the new skateboard. What is the net benefit of this €œpreventive€ quality activity?
3. What major difficulty would Lilly€™s managers have in implementing this costs-of- quality approach? What alternative approach could they use to measure quality improvement?

Predetermined Overhead Allocation Rate per Unit S 39 Predicted Reduction in Activity Units 415 415 1,000 400 225 Activity Inspection of incoming raw materials Inspection of finished goods Number of defective units discovered in-house Number of defective units discovered by customers Lost sales due to dissatisfied customers 53 70 102

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