Three Types of Costs When Quality Considerations

655 Words Aug 24th, 2013 3 Pages
Memo to my supervisor Jane Doyle
Hi Jane
I would like to bring to your attention three types of costs when quality considerations are made here at Acme Catsup Company. The first costs would be our failure costs. The second would be our appraisal costs. The third is the cost of prevention.
With failure costs some of the costs would be equipment break downs and spills. Our equipment costs 3 million dollars so we don’t want to replace it for at least 10 years. The routine maintenance for the equipment is $500,000 a year. The cost for the spills is a total of $120,000 a year. That includes $50,000 for the training classes on spill prevention and $70,000 for the salary of two new spill prevention workers.
Some costs of appraisal would be
…show more content…
With the spills we would have to hold extra training classes to train the existing workers to stop the machines before the spills happen. We would also have to hire two new workers to clean the spills as soon as they happen. The training would cost $50,000 and prevent 80% of the spills. The two new workers would cost $35,000 each per year for a total of $70,000. That $120,000 would be well spent because we are spending $500,000 now on spills and breakdowns.
The tradeoff associated with appraisal costs would also be profitable to Acme Catsup Company. Right now we are losing 3 million a year because of returns and defective products. The new data collecting system and third party audits would reduce returns and defects by 90%. This would save us $280,000. The cost for this data collection and third party audits would only be $70,000 a year. This is a small price to pay considering the amount of money we will save.
The cost of prevention is well worth the tradeoff. Mistake proofing, scheduled maintenance and Six Sigma will cost out company approximately 2 million a year. We will see the benefits of mistake proofing and scheduled maintenance after the first few months. These two things alone will save the company 5 million a year. Six Sigma will take a little longer to see the results of because of the lengthy process to implement it. After the second year we will see huge
Open Document