Question

The XYZ Manufacturing Company is evaluating options for spending on product quality and wants to find the optimal amount to spend on changing its processes to further prevent defects. Its engineers have developed the following estimates:

1. Defects
The current defect rate is 10%.
If it invests an additional $10 per unit in prevention costs, the defect rate will drop to 6%; spending $20 per unit on prevention drops the defect rate to 3%; spending $30 per unit drops the defect rate to 1.5% ; and investing $40 per unit on prevention reduces the defect rate to 1%.

2. Inspection
Inspection costs are $5 per unit. Inspection is successful at detecting 98% of defective units; the remaining 2% of defective products are sold and eventually returned for warranty repairs or replacement at no cost to the customer.

3. Internal failure costs are $400 per defective unit that is detected.

4. External failure costs are $1000 per unit returned.

5. Current production level is 1 million units.

Create and submit a spreadsheet that calculates total quality costs for the existing process and for each of the four options for investing in additional prevention.

Answer 1

The XYZ Manufacturing Company is evaluating options for spending on product quality and wants to find the optimal amount to spend on changing its processes to further prevent defects. This can be done by comparing the total quality costs for each option, which include prevention costs, inspection costs, internal failure costs, and external failure costs. By calculating the total quality costs for each option, the company can determine the most cost-effective option.

Step-by-step explanation:

The XYZ Manufacturing Company is considering different options for spending on product quality and wants to determine the optimal amount to spend on changing its processes to reduce defects. The company's engineers have provided estimates on how investing in prevention costs will affect the defect rate. By investing an additional $10 per unit in prevention costs, the defect rate will drop to 6%. Investing $20 per unit lowers the defect rate to 3%. Spending $30 per unit decreases the defect rate to 1.5%. Lastly, investing $40 per unit reduces the defect rate to 1%.

Based on this information, we can calculate the total quality costs for each option. The total quality costs consist of prevention costs, inspection costs, internal failure costs, and external failure costs. The prevention costs include the amount spent on changing processes, which is $10, $20, $30, and $40 per unit for the four options. The inspection costs are $5 per unit. The internal failure costs are $400 per defective unit detected. The external failure costs are $1000 per unit returned.

To calculate the total quality costs for each option, we can use the following formula:

1. Option 1: Total Quality Costs = (Prevention Costs + Inspection Costs) + (Defect Rate * Internal Failure Costs) + (Defect Rate * External Failure Costs)
2. Option 2: Total Quality Costs = (Prevention Costs + Inspection Costs) + (Defect Rate * Internal Failure Costs) + (Defect Rate * External Failure Costs)
3. Option 3: Total Quality Costs = (Prevention Costs + Inspection Costs) + (Defect Rate * Internal Failure Costs) + (Defect Rate * External Failure Costs)
4. Option 4: Total Quality Costs = (Prevention Costs + Inspection Costs) + (Defect Rate * Internal Failure Costs) + (Defect Rate * External Failure Costs)

By plugging in the values for each option, we can calculate the total quality costs and compare them to find the option with the lowest costs.