Cost of quality Elijah Electronics makes wireless headphone sets. The firm produced 76,500 wireless headphone sets during its first year of operation. At year-end, it had no inventory of finished goods. Elijah sold 71,910 units through regular market channels, but 765 of the units produced were so defective that they had to be sold as scrap. The remaining units were reworked and sold as seconds. For the year, the firm spent $408,000 on prevention costs and $204,000 on quality appraisal. There were no customer returns. An income statement for the year follows. Sales Regular channel $14,382,000 Seconds 363,375 Scrap 26,775 $14,772,150 Cost of goods sold Original production costs $4,889,880 Rework costs 107,100 Quality prevention and appraisal 612,000 $5,608,980 Gross margin $9,163,170 Selling and administrative expenses (all fixed) 2,499,000 Profit before income taxes $6,664,170 a. Compute the total pre-tax profit lost by the company in its first year of operations by selling defective units as seconds or as scrap rather than selling the units through regular channels. b. Compute the total failure cost for the company in its first year. c. Compute total quality cost incurred by the company in its first year.

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Chapter20: Inventory Management: Economic Order Quantity, Jit, And The Theory Of Constraints

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Cost of quality
Elijah Electronics makes wireless headphone sets. The firm produced 76,500 wireless headphone sets during its first year of operation. At year-end, it had no inventory of finished goods. Elijah sold 71,910 units through regular market channels, but 765 of the units produced were so defective that they had to be sold as scrap. The remaining units were reworked and sold as seconds. For the year, the firm spent $408,000 on prevention costs and $204,000 on quality appraisal. There were no customer returns. An income statement for the year follows.

Sales
Regular channel	$14,382,000
Seconds	363,375
Scrap	26,775	$14,772,150
Cost of goods sold
Original production costs	$4,889,880
Rework costs	107,100
Quality prevention and appraisal	612,000	$5,608,980
Gross margin		$9,163,170
Selling and administrative expenses (all fixed)		2,499,000
Profit before income taxes		$6,664,170

a. Compute the total pre-tax profit lost by the company in its first year of operations by selling defective units as seconds or as scrap rather than selling the units through regular channels.

b. Compute the total failure cost for the company in its first year.

c. Compute total quality cost incurred by the company in its first year.

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