Problem - Baby Care Ltd produces car seats for children up to three years old. The company is worried because one of its competitors has recently come under public scrutiny because of product failure. Historically, Baby Care's only problem with its car seats was stitching in the straps. The problem can usually be detected and repaired during an internal inspection. The cost of the inspection is $5.00 per car seat, and the repair cost is $1.00 per car seat. All 200,000 car seats were inspected last year, and 5% were found to have problems with the stitching in the straps during the internal inspection. Another 1% of the 200,000 car seats had problems with the stitching, but the internal inspection did not discover them. Defective units that were sold and shipped to customers needed to be shipped back to Baby Care and repaired. Shipping costs are $8.00 per car seat, and repair costs are $1.00 per car seat. However, the out-of-pocket costs (shipping and repair) are not the only costs of defects not discovered in the internal inspection. Negative publicity will result in a loss of future contribution margin of $100 for each external failure.
REQUIRED:
a. Calculate appraisal cost.
b. Calculate internal failure cost.
c. Calculate out-of-pocket external failure cost.
d. Determine the opportunity cost associated with the external failures.
e. What are the total costs of quality?
f. Baby Care is concerned with the high up-front cost of inspecting all 200,000 units. It is considering an alternative internal inspection plan that will cost only $3.00 per car seat inspected. During the internal inspection, the alternative technique will detect only 3.5% of the 200,000 car seats that have stitching problems. The other 2.5% will be detected after the car seats are sold and shipped. What are the total costs of quality for the alternative technique?
g. What factors other than cost should Baby Care consider before changing inspection techniques?