BreatheWell is very aware that its scuba diving tanks must be of the highest quality to maintain its reputation of excellence and safety. The company has retained you as a consultant and you have suggested that quantifying the costs would be important to the understanding and management of quality. Your experience as a cost accountant helped you determine year 2010 costs of quality from the company’s accounting records as follows:
Prevention Costs________________________________________
Foolproofing machinery …………………………….$20,000
Quality training ……………………………………… 60,000
Educating suppliers ………………………………….. 44,000
Appraisal Costs_________________________________________
Quality inspections ……………………………………$24,000
Recording defects ……………………………………. 18,000
Procedure verifications ………………………………. 12,000
Internal Failure Costs____________________________________
Waste disposal ………………………………………. $9,000
Unplanned downtime ……………………………….. 2,800
External Failure Costs____________________________________
Warranty handling …………………………………..$12,800
Customer reimbursements/returns ………………….. 10,200
You also determined that 2,400 of the 200,000 tanks made in 2010 had to be sold “for swimming pool use only” for $70 less profit per tank than regular tanks. BreatheWell also incurred $8,000 of rework costs that had been buried in overhead (in addition to the failure costs listed) in producing the tanks sold at the regular price.
a. BreatheWell’s management has asked you to determine the 2010 “costs” of the following:
1. Lost profit from the sale of the 2,400 units limited to use in swimming pools
2. Total failure cost
3. Total quality cost
b. Assume that the company is considering expanding its existing full two-year warranty to a full three-year warranty in 2011. How would such a change be reflected in quality costs?