Roxi, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Roxis senior managers expect the engineering work to reduce

Roxi, Inc. is using a costs-of-quality approach to evaluate design engineering efforts for a new skateboard. Roxi’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 cost allocation rates for each activity.

Requirements
1. Calculate the predicted quality cost savings from the design engineering work.
2. Roxi spent $ 109,000 on design engineering for the new skateboard. What is the net benefit of this “preventive” quality activity?
3. What major difficulty would Roxi’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to measure qualityimprovement?

Predetermined Overhead Allocation Rate per Unit $ 39 Predicted Reduction in Activity Units 385 385 1200 300 100 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 73 97