Golf Excellence Inc. manufactures golf shoes. The cleats, however are not always

Question

Golf Excellence Inc. manufactures golf shoes. The cleats, however are not always properly aligned and often need to be adjusted during the internal inspection process. The inspection costs and repair costs are $8 and $2, respectively. Of the 5,000 shoes inspected last year, 3% were found to have problems with the clears. Another 2% of the 5,000 shoes had problems with the cleats but were not detected during the internal inspection. Defective shoes were sold and shipped back to Golf Excellence and repaired. Shipping costs and repair costs per shoed are $10 and $4, respectively. Negative publicity will result in a loss of future contribution margin of $50 for each external failure.

Provide the following:

a. Appraisal cost

b. Internal failure cost

c. Out of pocket failure cost

d. Opportunity cost of external failure

e. Total cost of quality control

Explanation / Answer

Solution: a. Appraisal cost =$40,000 Working Notes: Appraisal cost = Inspection cost = inspection costs per unit x 5,000 shoes inspected =$8 x 5000 =$40,000 b. Internal failure cost =$300 Working Notes: Internal failure cost =rework costs = 3% x 5,000 shoes inspected x repair cost =3% x 5000 x $2 =$300 c. Out of pocket failure cost $1,400 Working Notes: Out-of-pocket cost = (shipping cost + repair cost) X defective units = 2% x 5,000 shoes inspected x (repair cost + shipping cost) = 2% x 5000 x (10+4) =1400 d. Opportunity cost of external failure $5,000 Working Notes: Opportunity cost of external failure = $50 for each external failure. =$50 x 2% x 5000 =5,000 e. Total cost of quality control $46,700 Working Notes: Total cost of quality control    Appraisal costs $40,000    Internal failure $300    External failure (out-of-pocket) $1,400    External failure (lost sales) $5,000 Total cost of quality control $46,700 Please feel free to ask if anything about above solution in comment section of the question.

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