Reference no: EM132157498
iCover produces covers for all makes and models of iPad. iCover sells 1 000 000 units each year at a price of $20 per unit and a contribution margin of 40%. A survey of iCover customers over the past 12 months indicates that customers were very satisfied with the products but a disturbing number of customers were disappointed because the products they purchased did not fit their iPads properly. They then had to hassle with returns and replacements. iCover’s managers want to modify their production processes to develop products that more closely match iCover’s specifications because the quality control in place to prevent ill-fitting products from reaching customers is not working very well. 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 replacements $400 000
Lost sales from customer returns $650 000
The Quality Control manager and controller have forecast the following additional costs to modify the
production process:
CAD design improvement $125 000
Improve machine calibration to specifications $210 000
Required
1. Which cost-of-quality category are managers focusing on? Is this a sound approach? Explain your answer.
2. If the improvements result in a 55% decrease in customer replacement cost and a 70% decrease in customer returns, what is the impact on the overall COQ and the company’s operating income? What should iCover do? Explain.
3. Calculate each COQ category as a percentage of total quality costs and of sales before and after the change in the production process. Comment briefly on your results.