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CMA Final · Strategic Cost Management · Quality Cost Management

Godavari Chemicals has a prevention-appraisal spend of Rs. 6,00,000 giving 6% defects on 50,000 units; each defect costs Rs. 400 (internal and external failure combined). Management expects that raising prevention-appraisal spend to Rs. 9,00,000 cuts defects to 3.5%, and a further rise to Rs. 12,00,000 cuts them to 2.5%. Which spend level has the lowest total cost of quality?

The Rs. 9,00,000 level is not correctly matched with total 17,00,000; the actual minimum is Rs. 9,00,000 with total Rs. 16,00,000.

  1. ARs. 6,00,000, total Rs. 18,00,000
  2. BRs. 12,00,000, total Rs. 22,00,000
  3. CRs. 9,00,000, total Rs. 17,00,000Correct
  4. DRs. 9,00,000, total Rs. 16,00,000

Explanation

At 6,00,000: defects 3,000 x 400 = 12,00,000; total 18,00,000. At 9,00,000: defects 1,750 x 400 = 7,00,000; total 16,00,000. At 12,00,000: defects 1,250 x 400 = 5,00,000; total 17,00,000. Lowest is 9,00,000 at 16,00,000, so the option stating Rs. 9,00,000 with total 17,00,000 is wrong on the total.

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