Activity-Based Costing, Lean Operations, and the Costs of Qual Assess the impact

Question

Activity-Based Costing, Lean Operations, and the Costs of Qual 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 ca- pacity to make the 1,000 extra units needed to meet the increased demand. The follow ing data reflect current operations (prior to making the operational changes) 54-17 13 100,000 Current production and sales level (in units Sales price per unit .. Current variable cost of making and selling one unit.. Variable warranty repair costs per unit repaired.. Current warranty repair rate of units produced 2 $150 $ 80 $ 30 10% What is the anticipated annual effect on operating income from adopting this quality ini- tiative? 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 opera- tional changes. Compute the difference between the "before" and the "after."

Explanation / Answer

Answer)

This answer is for the changes you made with the pencil.

Cost of quality before upgradation of component:

102000 units × 20% ×$35 = $714000

Cost of quality after upgradation of component:

Additional increase in cost+Warranty repair cost

(102000units×$2)+(102000units×20%×(1-90%)×$35)

=$275400

The difference between before and after:

$714000-$275400=$438,600 increase in operating income From adopting this quality initiation will the selling price and other being constant.

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