Question

iCover produces covers for all makes and models of iPad. iCover sells 1 000 000 units each year at a price
of $20 per unit and a contribution margin of 40%. A survey of iCover customers over the past 12 months
indicates that customers were very satisfied with the products but a disturbing number of customers were
disappointed because the products they purchased did not fit their iPads properly. They then had to hassle
with returns and replacements. iCover’s managers want to modify their production processes to develop
products that more closely match iCover’s specifications because the quality control in place to prevent
ill-fitting products from reaching customers is not working very well. The current costs of quality are as
follows:
Prevention costs $400 000
Appraisal costs $150 000
Internal failure costs
Rework $325 000
Scrap $ 75 000
External failure costs
Product replacements $400 000
Lost sales from customer returns $650 000
The Quality Control manager and controller have forecast the following additional costs to modify the
production process:
CAD design improvement $125 000
Improve machine calibration to specifications $210 000

Required
1. Which cost-of-quality category are managers focusing on? Is this a sound approach? Explain your
answer.
2. If the improvements result in a 55% decrease in customer replacement cost and a 70% decrease in
customer returns, what is the impact on the overall COQ and the company’s operating income? What
should iCover do? Explain.
3. Calculate each COQ category as a percentage of total quality costs and of sales before and after the
change in the production process. Comment briefly on your results

Answer 1

b)

c)