Verizon Manufacturing Company spent $400,000 in 2019 to inspect incoming components. Of the $400,000, $240,000 is fixed appraisal costs. The variable inspection cost is $0.20 per component. It takes two components for each finished product. Internal failure costs average $80 per failed unit of finished goods. In 2019, five percent of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ), Verizon contracted Quality-is-Free Consultants, Inc. (QIFC) to study ways to improve product quality and to reduce costs. Upon completion of the study, QIFC recommended automatic inspection equipment that requires a $60,000 annual cost for training and $150,000 for equipment rental and maintenance. The new equipment will eliminate $40,000 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by half. The company paid the consulting firm $100,000 in early January 2020 for the project. Verizon expects no changes in its operating level in the foreseeable future.

What is the current (i.e., 2019) total Cost of Quality (COQ)?
A) $400,000.
B) $1,600,000.
C) $2,400,000.
D) $2,800,000.
E) $5,200,000.

Question

Verizon Manufacturing Company spent $400,000 in 2019 to inspect incoming components. Of the $400,000, $240,000 is fixed appraisal costs. The variable inspection cost is $0.20 per component. It takes two components for each finished product. Internal failure costs average $80 per failed unit of finished goods. In 2019, five percent of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are one percent of units sold. The company manufactures all units as ordered and carries no materials inventories. Seeking to decrease its total cost of quality (COQ) , Verizon contracted Quality-is-Free Consultants, Inc. (QIFC) to study ways to improve product quality and to reduce costs. Upon completion of the study, QIFC recommended automatic inspection equipment that requires a $60,000 annual cost for training and $150,000 for equipment rental and maintenance. The new equipment will eliminate $40,000 of the fixed appraisal costs, reduce the amount of unacceptable product units in the manufacturing process by 10 percent, and cut product failures by half. The company paid the consulting firm $100,000 in early January 2020 for the project. Verizon expects no changes in its operating level in the foreseeable future.

What is the current (i.e., 2019) total Cost of Quality (COQ) ?

What is the current (i.e., 2019) total Cost of Quality (COQ)?
A) $400,000.
B) $1,600,000.
C) $2,400,000.
D) $2,800,000.
E) $5,200,000.

Quizplus · Accepted Answer

Total COQ = Appraisal cost + Prevention cost + Internal failure cost + External failure cost
= $400,000 + $0 + ($80 × 0.05 × Total units produced) + ($200 × 0.01 × Total units sold)
Assuming that Verizon produces 100,000 units of finished goods and sells them all, the total COQ would be:
= $400,000 + $0 + ($80 × 0.05 × 200,000) + ($200 × 0.01 × 100,000) 
= $400,000 + $800,000 + $200,000 
= $2,400,000

Answer: A and D

Choice A: Doing nothing is not the best choice, as the company would continue to incur the same COQ, leading to a higher cost.
Choice D: Implementing QIFC’s recommendation would decrease the COQ, leading to a lower cost. As the company expects no changes in its operating level in the foreseeable future, the new equipment will have a long-term impact on cost reduction. Therefore, this is the best choice.

Verizon Manufacturing Company Spent $400,000 in 2019 to Inspect Incoming