Question

Boingo 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. (Click on the icon to view the information.) Data Table - X Read the requirements Predicted Reduction in Activity Units Activity Cost Allocation Rate per Unit 305 $ 21 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 305 $ 27 Activity 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. 3,400 $ 14 925 $ 39 270 $ 55 Lost sales to dissatisfied customers Print Done Total predicted quality cost savings Requirement 2. The company spent $72,000 on design engineering for the new toy robot. What is the net benefit of this "preventive" quality activity? Less: Net benefit of design engineering Requirement 3. What major difficulty would management have had in implementing this costs-of-quality approach?

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Answer 1

1) Calculation of predicted quality cost savings :-

Activity	Predicted reduction in activity units (A)	Allocation rate (Activity Cost) (B)	Predicted quality cost savings (A*B)
Inspection of Incoming Materials	$305	21	$6405
Inspection of Finished Goods	$305	27	$8235
No. of Defective units duscovered in house	$3400	14	$47600
No. of defective units discovered by customers	$925	39	$36075
Lost Sales to dissatisfied customers	$270	55	$14850
Total Predicted quality cost savings			$113165

2) Net Benefit of Design Engineering :-

Particulars	Amount($)
Total Predicted Quality Cost Savings	$113165
Less : Spent on Design Engineering	($75000)
Net Benefit of Design Engineering	$38165

3) The Major difficulty faced in estimating the quality cost, estimation of any design cost to be spent for quality

control, allocation of various cost.