Chapter 6, Problem 1DQ

Summary Introduction

To determine: The way quality can reduce the cost.

Introduction:

Quality is a state of performance, and the excellence of a product or service differentiates it from the competitors’ products.

Explanation of Solution

Determine the way quality can reduce the cost:

Improving quality leads to reduced costs in the following ways:

• Higher quality means less rejection, scrap, or rework. Therefore, there are savings with improved quality in terms of material costs and labor costs, besides better utilization of machinery and other capital assets.
• Poor quality also leads to customer dissatisfaction, customer complaints, and warranty costs, besides the impairment of the company’s brand image. All these add to the costs in significant ways. Improving quality will save such costs.
• Higher quality improves the company’s image in the market, contributing to the increase in the market share. It becomes easier to sell and therefore marketing costs such as advertising, sales promotion, discounts, and so on can be reduced.
• Higher quality and consequently increased market share also increase the production volumes, resulting in scale economies. Consequently, the portion of fixed costs in the unit cost comes down significantly.
• The good quality image also helps in not only attracting the talented people in the organization, but also in retaining them. Recruitment costs would come down, besides salary costs. Talented employees would be proud that they are on the payrolls of a quality conscious organization.
• Improved quality also enhances the company’s image with the investors, financial institutions, and so on, resulting in lower costs of raising finance.