Cost of Quality

The following information pertains to Omni, Inc., for 19x8:

Sales $30,000,000
External failure costs 900,000
Internal failure costs 1,800,000
Prevention costs 400,000
Appraisal costs 600,000

1. Calculate each category of quality costs as a percentage of sales.

2. Calculate total quality costs as a percentage of sales.
3. If quality costs were reduced to 2.5 percent of sales, determine the increase in profit that
would result.

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1. External failure costs: $900,000/$30,000,000= 3.0%
Internal failure costs: $1,800,000/~$30,000,000= 6.0%
Prevention costs: $400,000/$30,000,000= 1.3%
Appraisal costs: $600,000/$30,000,000 = 2.0%

2. Total quality costs: $3,700,000/$30,000,000= 12.3%

3. Current quality costs $3,700,000
Goal (2.5% X $30,000,000) 750,000 . So Increase in profit $2,950,000
Cost of Quality
Questions
1. Classify each of the costs as prevention costs, appraisal costs, internal failure costs, or
external failure costs: ( a )quality training; ( b )materials inspection; ( c )scrap; ( d )rework; (e)
product inspection; (f) product warranty
2
Calculations
Cost of Quality-2
Cost of Quality-2