Question

A production line engineer, Shane, checks every chip for quality control (QC). His workers find errors approximately every 150 chips. Either the defective chips must be sent back for repair or they must be axed (thrown away). The manager, Rob, has mandated that workers must axe all defective chips. Rob walks over to Shane's line and declares, "Why some lines sink more dollars into a chip that's failed, I don't understand. We only make 25 cents off of each chip anyway! Spending an additional $2.00 per chip will only be more money down the drain. Shane, in our line of work we can't afford to flush money down the toilet." The following afternoon, Rob calls a meeting in his office. Rob informs Shane, that Shane's line is axing too many chips. "One chip every hundred and fifty is unacceptable! This is becoming a substantial cost to the company. I believe that it would be more beneficial to allow defective chips to go out the door." Shane asks, "What about the defective chips? Won't customers complain?" Rob replies, "Yeah, yeah, but that's not your problem, the company has a return department that will replace them as customers complain." Rob further estimates that allowing defective chips on the market will yield a $416,000 profit for the company

Answer 1

Answer:

the question is incomplete:

The line produces 100,000 chips per year.

Every chip is purchased.

Chips cost about $9.00 to produce.

Chip testing runs about $4.00 per chip.

Chip repair (manpower and material) is about $2.00.

This repair cost includes re-testing.

Profit per chip is $0.25 after testing.

There are fifteen full time employees working under Shane.

Two part-time employees work under Shane's supervision.

Shane's manager has been with the company for about 7 years.

Shane has been working under the same manager for several years and has had relatively good relations with Rob.

the requirements are:

1. What percent of the chips may fail if Xanthum, Inc. Orders 15,000 chips from Shane's production line?

• 1 out of every 150 chips is defective, so % of defective ships = (1 / 150) x 100 = 0.667%
• since Xanthum ordered 15,000 chips, approximately 100 chips will be defective

2. Do you believe this is an acceptable failure rate? From the perspective of Xanthum? From the perspective of the manufacturer? Why (not)?

• As a client (Xanthum), no failure rate is acceptable. I personally would return the chips and probably not buy from them anymore. Imagine that you use the chips to manufacture something else, then the defective chips will hurt you product's reputation and will cost you money.  
• As a manufacturer, it is an acceptable rate since 99.333% of the chips don't have any type of defect. The problem is not the failure rate (which is really small), the problem is doing nothing about it.

3. If Shane's line produces 100,000 chips per year how much will it cost to:

a) Test and repair each chip?

• you will spend 100,000 x $4 = $400,000 testing the chips
• repair costs = (100,000 x 0.667%) x $2 = $1,333.33

b) Test all chips and ax the defective chips?

• you will spend 100,000 x $4 = $400,000 testing the chips
• costs from axed chips = 667 chips x ($9 + $4) = $8,671

c) Test no chips and replace customers chips on an as-need basis?

• if you do not test any chip, then the testing cost is $0
• the total amount of defective chips returned can vary from 0 - 667, if 0 are returned, then the cost of replacing chips is $0. If 667 chips are returned, the replacement cost = (667 x $9) + lost profit from replaced chips = $6,003 + [667 x ($4 + $2 + $0.25)] = $6,003 + $4,168.75 = $10,171.75 pus any other costs associated to replacing the chips

4. Is the Rob's estimate reasonable? What about his assertion that it is cheaper not to discard the defective chips?

• Since replacing defective chips is much cheaper than testing and repairing them, then Rob is right about earning more money by not repairing them. But, he is not considering how the company's sales will be affected by selling defective chips. If we return to question 2, if I was a client, i wouldn't buy any more chips from Rob's company since they are defective. The costs of defective parts can result in potential lawsuits and product reputation. Rob is only considering manufacturing costs, he is not considering how this might affect the company in other ways. E.g. Imagine that Xanthum manufactures medical equipment and since Rob's chips were defective, they fail. If Xanthum is sued by its customers, Rob's company will also be sued.