4) Internal failure costs occur when the company detects and corrects poor-quality goods or services before delivery to customers.
5) Costs spent to detect poor-quality goods are considered appraisal costs.
6) Costs incurred when the company corrects for poor-quality goods before they are delivered to the customer are considered internal failure costs.
7) Costs incurred after the company sells poor-quality goods to the customer are considered external failure costs.
8) Alonzo Company has been experiencing lost sales and high returns recently, so they decided to undertake a comprehensive quality program. Here are factors being considered:
Estimated lost profits due to poor quality products$200,000
Excessive warranty repair costs$60,000
Costs of correcting for defective goods on the assembly line$10,000
If the cost of implementing the quality program is under $270,000, the company should go forward with it.
9) Nirvana Products Company has just gone through a rigorous evaluation due to sliding profits in the past year. The engineers strongly recommend implementing an aggressive preventative maintenance program, but the accountants say it will cost $50,000. The lawyers insist on a zero-defect product inspection as the units are being packaged, but the accountants say it will cost $40,000. The vice president for production said he just thought it was too expensive of a gamble to take, but the factory manager pointed out that if they did not look ahead at the consequences, they could easily lose $100,000 of sales to their competitors because of shoddy goods, and a costly production shutdown that would cost them another $100,000 if the machinery gives out unexpectedly.
In this situation, the company should not invest in the quality programs being recommended because they are not justified on a cost/benefit basis.
10) Pollenti Company has just merged with another industrial firm whose business had been failing. Pollenti immediately conducted a thorough study of the new company's work processes, and produced a report including the data shown below:
•A new inspection process is recommended to minimize defective raw materials. It would cost $12,000 to implement.
•Shoddy business practices are resulting in excessive warranty costs?$15,000 more than normal due mainly to material failure.
•Reengineering of the assembly line will increase productivity. It would cost $18,000 to implement.
•Inefficient workplace design is costing $5,000 in unnecessary rework costs.
•Estimated amount of lost profits due to dissatisfied customers who turn to the competition is $80,000.
Based on an analysis of costs and benefits, a quality improvement plan would not be recommended.
11) Which of the following is NOT an internal failure cost?
A) Production losses caused by downtime
B) Warranty costs
C) Rework costs
D) Rejected product units
12) Which of the following categories includes costs incurred in detecting poor quality goods or services?
A) External failure costs
B) Prevention costs
C) Appraisal costs
D) Internal failure costs
13) Which of the following categories includes costs incurred when poor quality goods or services are detected before delivery to customers?
A) Appraisal costs
B) Internal failure costs
C) Prevention costs
D) External failure costs