Chapter 19, Problem 19.21E

Costs of quality, quality improvement. iCover produces bags for carrying laptop computers. iCover sells 1,000,000 units each year at a price of $20 per unit and a contribution margin of 40%.

To respond to customer complaints, iCover’s mangers want to modify the production processes to produce higher-quality products.

The current costs of quality are as follows:

Prevention costs	$400,000
Appraisal costs	$150,000
Internal failure costs
Rework	$325,000
Scrap	$ 75,000
External failure costs
Product repair costs	$400,000
Lost sales from customer returns	$650,000

1. 1. Which costs of quality category are managers focusing on? Why?

Required

1. 2. If the improvements result in a 55% decrease in product repair costs and a 70% decrease in lost sales from customer returns, what is the impact on the overall COQ and the company’s operating income? What should iCover do? Explain.
2. 3. Calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs and as a percentage of sales before and after the change in the production process. Comment briefly on your results.