Using ABC in conjunction with quality decisions (Learning Objectives 2, S)

Big Sky is using a costs-of-quality approach to evaluate design engineering efforts for a new wakeboard. Big Sky’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 wakeboards 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. Big Sky spent $106,000 on design engineering for the new wakeboard. What is the net benefit of this “preventive” quality activity?
3. What major difficulty would Big Sky’s managers have in implementing this costs-of-quality approach? What alternative approach could they use to mea¬ sure quality improvement?

Activity Inspection of incoming materials............ Inspection of work in process.... Number of defective units discovered in-house.... Number of defective units discovered by customers Lost sales to dissatisfied customers....... Predicted Reduction in Activity Activity Cost Allocation Rate per Unit Units 400 $ 40 400 20 1,100 50 300 70 100 110