Chapter 8, Problem 39P

Advanced Technologies (AT) produces two compression machines that are popular with manufacturers of plastics: no. 165 and no. 172. Machine no. 165 has an average selling price of $60,000, whereas no. 172 typically sells for approximately $55,000. The company is very concerned about quality and has provided the following information:

Required:

1. 1. Classify the preceding costs as prevention, appraisal, internal failure, or external failure.
2. 2. Using the classifications in requirement (1), compute AT’s quality costs for machine no. 165 in dollars and as a percentage of sales revenues. Also calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs.
3. 3. Repeat requirement (2) for machine no. 172.
4. 4. Comment on your findings, noting whether the company is “investing” its quality expenditures differently for the two machines.
5. 5. Quality costs can be classified as observable or hidden. What are hidden quality costs, and how do these costs differ from observable costs?