Construction Toys Corp is using a costsofquality approach to

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

Predicted

Reduction in

Activity

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

DATA TABLE

Predicted

Activity Cost

Reduction in

Allocation Rate

Activity

Activity Units

per Unit

Inspection of incoming materials. . . . . . . . . . . . . . . . . .

310

$23

Inspection of finished goods. . . . . . . . . . . . . . . . . . . . .

310

$27

Number of defective units discovered in-house. . . . . . . . .

3,000

$19

Number of defective units discovered by customers. . . .

880

$42

Lost sales to dissatisfied customers. . . . . . . . . . . . . . .

260

$56

REQUIREMENT

1.

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

2.

$ 65 comma 000$65,000

3.

What major difficulty would management have had in implementing thiscosts-of-quality approach? What alternative approach could it use to measure quality improvement

		Predicted
		Reduction in
Activity		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 DATA TABLE Predicted Activity Cost Reduction in Allocation Rate Activity Activity Units per Unit Inspection of incoming materials. . . . . . . . . . . . . . . . . . 310 $23 Inspection of finished goods. . . . . . . . . . . . . . . . . . . . . 310 $27 Number of defective units discovered in-house. . . . . . . . . 3,000 $19 Number of defective units discovered by customers. . . . 880 $42 Lost sales to dissatisfied customers. . . . . . . . . . . . . . . 260 $56		REQUIREMENT 1. Calculate the predicted quality cost savings from the design engineering work. 2. The company spent $ 65 comma 000$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 thiscosts-of-quality approach? What alternative approach could it use to measure quality improvement

Solution

Part 1- Calculation of predicted quality cost savings

Part 2 - Construction corp. inc.

Net Benefit design engineering for the new toy robot

Part 3 - There are many difficulties faced by management in implementing cost of quality approach such as difficulty faced in estimating the quality cost, estimation of any design cost to be spent for quality control, allocation of various cost.

Due to these difficulties, management used to prepare the non financial data focusing on quality aspects like Experience analysis, machine brekadowns records, customer grievances.

Activity	Predicted reduction in activity units (A)	Allocation rate (activity cost) (B)	Predicted quality cost savings (A*B)
Inspection of incoming materials	310	$23	$7130
Inspection of finished goods	310	$27	$8370
Number of defective units discovered in-house	3000	$19	$57000
Number of defective units discovered by customers	880	$42	$36960
Lost sales to dissatisfied customers	260	$56	$14560
Total Predicted quality cost savings			$124020