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Industrial Technologies, Inc. (ITI), produces two compression machines that are popular with manufacturers of plastics: no. 165 and no. 172. Machine no. 165 has an average selling price of $30,000, whereas no. 172 typically sells for approximately $27,500. The company is very concerned about quality and has provided the following information:
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Question & Answer: Industrial Technologies, Inc. (ITI), produces two compression machines that are popular with manufacturers of plastics: no. 165 and no…..
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| No. 165 | No. 172 | |||||
| Number of machines produced and sold | 160 | 200 | ||||
| Warranty costs: | ||||||
| Average repair cost per unit | $ | 900 | $ | 350 | ||
| Percentage of units needing repair | 70 | % | 10 | % | ||
| Reliability engineering at $150 per hour | 1,600 | hours | 2,000 | hours | ||
| Rework at ITI’s manufacturing plant: | ||||||
| Average rework cost per unit | $ | 1,900 | $ | 1,600 | ||
| Percentage of units needing rework | 35 | % | 25 | % | ||
| Manufacturing inspection at $50 per hour | 300 | hours | 500 | hours | ||
| Transportation costs to customer sites to fix problems | $ | 29,500 | $ | 15,000 | ||
| Quality training for employees | $ | 35,000 | $ | 50,000 | ||
| Required: |
| 1. | Classify the preceding costs as prevention, appraisal, internal failure, or external failure. |
| 2. Using the classifications in part (1), compute ITI’s quality costs for machine no. 165 in dollars and as a percentage of sales revenues. Also calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs. (Round “Percentage of Total Quality Costs” to 2 decimal places. Total may not be equal to 100% due to rounding.)
3. Using the classifications in part (1), compute ITI’s quality costs for machine no. 172 in dollars and as a percentage of sales revenues. Also calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs. (Round “Percentage of Total Quality Costs” to 2 decimal places. Total may not be equal to 100% due to rounding.)
. |
Expert Answer
1.CLASSIFICATION OF COSTS
Prevention:
- Reliability engineering
- Quality training for employees
Appraisal:
- Manufacturing inspection
Internal Failure:
- Rework at it is manufacturing plant
External failure:
- Repair cost
- Transportation cost to customer sites to fix problems
2.QUALITY COSTS OF MACHINE NO: 165
| Quality Cost of | |||||
| Machine no.No. 165 | |||||
| Prevention Costs: | |||||
| Reliability engineering | $ 240,000 | (150*1600 | |||
| Quality training for employees | $35,000 | ||||
| A | Total prevention cost | $ 275,000 | |||
| Appraisal Costs: | |||||
| Manufacturing inspection | $ 15,000 | (300*50) | |||
| B | Total appraisal cost | $15,000 | |||
| Internal failure costs: | |||||
| Rework at ITIs manufacturing plant | $ 106,400 | (0.35*160*1900) | |||
| C | Total internal failure cost | $106,400 | |||
| External failure costs: | |||||
| Warranty Repair cost | $ 100,800 | (0.70*160*900) | |||
| Transportation cost to customer sites to fix problems | $29,500 | ||||
| D | Total external failure cost | $ 130,300 | |||
| E=A+B+C+D | TOTAL QUALITY COST | $ 526,700 | |||
| Number of machines produced and sold | 160 | ||||
| Average selling price | $30,000 | ||||
| Sales Revenue | $4,800,000 | (30000*160) | |||
| QUALITY COST AS PERCENTAGE OF SALES REVENUE | 10.97% | (526700/4800000)*100 | |||
| TYPES OF COSTS AS PERCENTAGE OF TOTAL QUALITY COST: | |||||
| Prevention Costs: | 52.21% | (275000/526700)*100 | |||
| Appraisal Costs: | 2.85% | (15000/526700)*100 | |||
| Internal failure costs: | 20.20% | (106400/526700)*100 | |||
| External failure costs: | 24.74% | (130300/526700)*100 |
3.QUALITY COSTS OF MACHINE NO: 172
| Quality Cost of | |||
| Machine no.No. 172 | |||
| Prevention Costs: | |||
| Reliability engineering | $ 300,000 | (150*2000) | |
| Quality training for employees | $50,000 | ||
| A | Total prevention cost | $ 350,000 | |
| Appraisal Costs: | |||
| Manufacturing inspection | $ 25,000 | (500*50) | |
| B | Total appraisal cost | $25,000 | |
| Internal failure costs: | |||
| Rework at ITI manufacturing plant | $ 80,000 | (0.25*200*1600) | |
| C | Total internal failure cost | $80,000 | |
| External failure costs: | |||
| Warranty Repair cost | $ 7,000 | (0.10*200*350) | |
| Transportation cost to customer sites to fix problems | $15,000 | ||
| D | Total external failure cost | $ 22,000 | |
| E=A+B+C+D | TOTAL QUALITY COST | $ 477,000 | |
| Number of machines produced and sold | 200 | ||
| Average selling price | $27,500 | ||
| Sales Revenue | $5,500,000 | (27500*260) | |
| QUALITY COST AS PERCENTAGE OF SALES REVENUE | 8.67% | (477000/5500000)*100 | |
| TYPES OF COSTS AS PERCENTAGE OF TOTAL QUALITY COST: | |||
| Prevention Costs: | 73.38% | (350000/477000)*100 | |
| Appraisal Costs: | 5.24% | (25000/477000)*100 | |
| Internal failure costs: | 16.77% | (80000/477000)*100 | |
| External failure costs: | 4.61% | (22000/477000)*100 |
