3. The overall impact of the company’s increased emphasis on quality over
the past year has been positive in that total quality costs have de-
creased from 16% of sales to 13.6% of sales. Despite this improvement,
the company still has a poor distribution of quality costs. The bulk of the
quality costs in both years is traceable to internal and external failure,
rather than to prevention and appraisal. Although the distribution of
these costs is poor, the trend this year is toward more prevention and
appraisal as the company has given more emphasis on quality.
Probably due to the increased spending on prevention and appraisal ac-
tivities during the past year, internal failure costs have increased by one
half, going from $2.4 million to $3.6 million. The reason internal failure
costs have gone up is that, through increased appraisal activity, defects
are being caught and corrected before products are shipped to custom-
ers. Thus, the company is incurring more cost for scrap, rework, and so
forth, but it is saving huge amounts in field servicing, warranty repairs,
and product recalls. External failure costs have fallen sharply, decreasing
from $6.9 million last year to just $2.7 million this year.
If the company continues its emphasis on prevention and appraisal—and
particularly on prevention—its total quality costs should continue to de-
crease in future years. Although internal failure costs are increasing for
the moment, these costs should decrease in time as better quality is de-
signed into products. Appraisal costs should also decrease as the need
for inspection, testing, and so forth decreases as a result of better engi-
neering and tighter process control.
Problem 2-19 (30 minutes)
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