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# AT produces two compression machines

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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:
No. 165 No. 172
Number of machines produced and sold 80 100
Warranty costs:
Average repair cost per unit........ \$1,200 \$400
Percentage of units needing repair .... 70% 10%
Reliability engineering at \$150 per hour 1,600 hrs 2,000 hrs
Rework at AT's manufacturing plant:
Average rework cost per unit............ \$1,900 \$1,600
Percentage of units needing rework....... 35% 25%
Manufacturing inspection at \$50 per hour 300 hours 500 hours
Transportation costs to customer sites fix problem \$29,500 \$15,000
Quality training for employees................ \$35,000 \$50,000

1. Classify the preceding costs as prevention, appraisal, internal failure, or external failure
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 percentage of total quality costs.
3. Repeat requirement (2) for machine no. 172
4. Comment on your findings, noting whether the company is "investing" its quality expenditures differently for the two machines.
5. Quality costs can be classified as ovservable or hidden. What are hidden quality costs, and how do these costs differ from observable costs?

#### Solution Preview

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:

No. 165 No. 172
Number of machines produced and sold 80 100
Warranty costs:
E Average repair cost per unit........ \$1,200 \$400
Percentage of units needing repair .... 70% 10%
P Reliability engineering at \$150 per hour 1,600 hrs 2,000 hrs
I Rework at AT's manufacturing plant:
Average rework cost per unit............ \$1,900 \$1,600
Percentage of units needing rework....... 35% 25%
A Manufacturing inspection at \$50 per hour 300 hours 500 hours
E Transportation costs to customer sites fix problem \$29,500 \$15,000
P Quality training for employees................ \$35,000 \$50,000

1. Classify the preceding costs as prevention (P), appraisal (A), internal failure (I), or external failure (E)

Prevention cost: Quality training for employees, Reliability engineering

Appraisal cost: Manufacturing inspection

Internal failure ...

#### Solution Summary

This solution is comprised of a detailed explanation to classify the preceding costs as prevention, appraisal, internal failure, or external failure, compute AT's quality costs for machine no. 165 in dollars and as a percentage of sales revenues, and comment on your findings, noting whether the company is "investing" its quality expenditures differently for the two machines.

\$2.19