Chapter 4, Problem 4.17SE

Assess the impact of a quality initiative (Learning Objective 5)

Dayton Industries is contemplating some operational changes to reduce its overall costs of quality. The company believes that if it upgrades one component of its product at an additional cost of $2.00 per unit, it will be able to decrease its current warranty repair rate by 90%. The company also believes it will be able to sell 1,000 more units over the next year due to an enhanced reputation for quality. Dayton currently has enough excess capacity to make the 1,000 extra units needed to meet the increased demand. The following data reflect current operations (prior to making the operational changes):

Current production and sales level (in units)	100,000
Sales price per unit	$150
Current variable cost of making and selling one unit	$ 80
Variable warranty repair costs per unit repaired	$ 30
Current warranty repair rate of units produced	10%

What is the anticipated annual effect on operating income from adopting this quality initiative? To answer this question, first calculate the total costs of quality before making the operational changes and then calculate the total costs of quality after making the operational changes. Compute the difference between the “before” and the “after.”