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question archive Costs of quality

Costs of quality

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Costs of quality. (CMA, adapted) Osborn, inc., produces cell phone equipment. Amanda Westerly, Osborn's president, decided to devote more resources to the improvement of product quality after learning that her company had been ranked fourth in product quality in a 2011 survey of cell phone users. Osborn's quality-improvement program has now been in operation for 2 years, and the cost report shown here has recently been issued.

                         
  Semi-Annual COQ Report, Osborn, inc. (in thousands)  
    6/30/2012 12/31/2012 6/30/2013 12/31/2013  
   
   
  Prevention costs    
  Machine Maintenance $480 $480 $440 $290  
  Supplier training 21 90 45 35  
  Design reviews 30 218 198 196  
    Total prevention costs 531 788 683 521  
  Appraisal costs    
  Incoming inspections 109 124 89 55  
  Final testing 327 327 302 202  
    Total appraisal costs 436 451 391 257  
  Internal failure costs    
  Rework 226 206 166 115  
  Scrap 127 124 68 65  
    Total internal failure costs 353 330 234 180  
  External failure costs    
  Warranty repairs 182 89 70 67  
  Customer returns 594 510 263 186  
    Total external failure costs 776 599 333 253  
  Total quality costs $2,096 $2,168 $1,641 $1,211  
  Total revenues $8,220 $9,180 $9,260 $9,050  
                         

For each period, calculate the ratio of each COQ category to revenues and to total quality costs.

Based on the results of requirement 1, would you conclude that Osborn's quality program has been successful? Prepare a short report to present your case.For each period, calculate the ratio of each COQ category to revenues and to total quality costs.

Based on the 2011 survey, Amanda Westerly believed that Osborn had to improve product quality. In making her case to Osborn management, how might westerly have estimated the opportunity cost of not implementing the quality-improvement program?

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