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Construction Toys Corp. 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.

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Part 1

Requirement 1. Calculate the predicted quality cost savings from the design engineering work.

Activity	Predicted Reduction in Activity Costs
Inspection of incoming materials. . . . . . . . . . . . . . . . . . . . . .
Inspection of finished goods. . . . . . . . . . . . . . . . . . . . . . . . . .
Number of defective units discovered in-house. . . . . . . . . .
Number of defective units discovered by customers. . . . .
Lost sales to dissatisfied customers. . . . . . . . . . . . . . . . . . .
Total predicted quality cost savings

Part 2

Requirement 2. The company spent

$55,000

on design engineering for the new toy robot. What is the net benefit of this "preventive" quality activity?

Less:
Net benefit of design engineering

Part 3

Requirement 3. What major difficulty would management have had in implementing this costs-of-quality approach?

Measuring the cost of engineering is difficult.

Measuring the cost of inspection activities is difficult.

Measuring the cost of quality related activities is difficult.

Part 4

What alternative approach could it use to measure quality improvement?

Focus only on financial measures of quality.

Monitor competitors' measures of quality and continuously try to improve them.

Monitor nonfinancial measures of quality and attempt to improve them.

Activity	Predicted Reduction in Activity Units	Activity Cost Allocation Rate per Unit
Inspection of incoming materials. . . . . . . . . . . . . . . . . . . . .	310	$16
Inspection of finished goods. . . . . . . . . . . . . . . . . . . . . . . . .	310	$26
Number of defective units discovered in-house. . . . . . . . .	3,000	$11
Number of defective units discovered by customers. . . . .	825	$45
Lost sales to dissatisfied customers. . . . . . . . . . . . . . . . . .	290	$60

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