Saturday, 21 October 2017

An example on external failure costs in quality accounting

Quality accounting: an example on external failure costs:


Due to the recently occurrence of production problem, complaints on defective products have been made by some customers. The company reckons that sales quantity of the product involved will drop by 1,000 units per annum. The contribution margin per unit of the product is $200. What is the opportunity cost of the external failure costs in this case?


Answer: 1,000 units x $200 per unit  = $200,000 per annum.

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