A Company Is Considering Spending the Following on a New

question 118

Essay

A company is considering spending the following on a new quality improvement program:
$$\begin{array} { l l } \text { Inspect raw materials } & \$ 123,000 \\\text { Reengineer to improve product quality } & 760,000 \\\text { Inspect finished goods } & 150,000 \\\text { Preventive maintenance of equipment } & 140,000\end{array}$$ The company expects this quality program to reduce costs by the following amounts:
$$\begin{array} { l l } \text { Avoid lost profits due to unhappy customers } & \$ 910,000 \\\text { Fewer sales retums } & 65,000 \\\text { Decrease the cost of rework } & 155,000 \\\text { Lower warranty costs } & 54,000\end{array}$$ Group each cost under the four categories of quality management systems.Comment whether the company should undertake the quality improvement program.

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Definitions:

Normal Good

A type of good for which demand increases when consumer income rises and decreases when consumer income falls.

Income

Money received, especially on a regular basis, for work or through investments.

Quantity Demanded

Refers to the amount of a good or service that consumers are willing and able to purchase at a given price over a specified period of time.

Price Elastic

Refers to the sensitivity of the demand for a product in response to changes in its price.