Reference no: EM133073513

Question - Mont Corp produces and sells 1,000 dining tables per year. Currently its only quality problem with the products is related to varnishing. It currently incurs $400 per year for quality training and $600 per year for reliability engineering. Inspection cost is $6 per unit, and all units produced are inspected.

Traditionally, at an internal inspection, 9% of all units fully-produced are found to have problems with the varnishing, and are reworked. Rework cost is $100 per unit. Defective units sold to customers are returned to the company and reworked. External failures are 1% of units sold, and the company incurs the shipping costs at the rate of $20 per unit.

In 2020, management are considering an alternative method of inspecting products which will reduce inspection cost by $1.50 per unit. The alternative method will reduce the internal failure to 4% of all units produced, and increase the external failure rate to 6% of all units sold. In addition, with the alternative inspection plan, there will be a loss of future contribution margin of $80 for each external failure.

Required - For 2020, compute the cost of each quality category (i.e., prevention, appraisal, internal failure and external failure costs) and the total cost of quality for Mont Corp assuming that:

(a) the current inspection method continues to be in place

(b) the alternative inspection method is adopted