P4-47B U sing ABC in conjunction with quality decisions

(Learning Objectives 2 & 5)

Large Construction Toys Corporation is using a costs-of-quality approach to evaluate design engineering efforts for a new toy robot. The company’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 toy robot follow. Also shown are the cost allocation rates for the activities.

Activity Predicted Reduction in Activity Units Activity Cost Allocation Rate per Unit Inspection of incoming materials............................................... 390 $20 Inspection of finished goods...................................................... 390 $32 Number of defective units discovered in-house........................ 3,500 $12 Number of defective units discovered by customers................ 900 $41 Lost sales to dissatisfied customers........................................... 290 $58 Requirements 1. Calculate the predicted quality cost savings from the design engineering work.
2. The company spent $65,000 on design engineering for the new toy robot. What is the net benefit of this “preventive” quality activity?
3. What major difficulty would management have had in implementing this costs-of-quality approach? What alternative approach could it use to measure quality improvement?