Question

Nuke-It-Now manufactures microwave ovens. The following represents the financial information from one of its manufacturing plants for two years.

	Year 1			Year 2
Sales	$	3,590,000		$	3,880,000
Costs
Redesign process	$	30,000		$	37,200
Discard defective units		37,500			43,400
Training on equipment		247,000			213,000
Warranty claims		131,000			178,000
Contract cancellations		202,000			162,000
Rework		72,000			93,000
Preventive maintenance		124,000			160,000
Product liability claims		307,000			172,000
Final inspection		203,000			204,000

Required:

a. Classify these items into Prevention, Appraisal, Internal failure, or External failure costs.

Activity	Category
Redesign process
Discard defective units
Training on equipment
Warranty claims
Contract cancellations
Rework
Preventive maintenance
Product liability claims
Final inspection

b. Calculate the ratio of the prevention, appraisal, internal failure, and external failure costs to sales for year 1 and year 2.

	Year 1		Year 2
Prevention		%		%
Appraisal		%		%
Internal failure		%		%
External failure		%		%

Answer 1

• Requirement [a]

Activity	Category	Year 1	Year 2
Redesign process	Prevention	$30,000	$37,200
Discard defective units	Internal Failure	$37,500	$43,400
Training on equipment	Prevention	$247,000	$213,000
Warranty claims	External failure	$131,000	$178,000
Contract cancellations	External failure	$202,000	$162,000
Rework	Internal Failure	$72,000	$93,000
Preventive maintenance	Prevention	$124,000	$160,000
Product liability claims	External failure	$307,000	$172,000
Final inspection	Appraisal	$203,000	$204,000

• [b]

	Year 1	Year 2
Prevention	11.2%	10.6%
Appraisal	5.7%	5.3%
Internal failure	3.1%	3.5%
External failure	17.8%	13.2%