Managing for Quality and Performance Excellence 10th Edition by James Evans ,William Lindsay

Exercise 45

Note: Data sets for many problems in this chapter are available in the Excel workbook C09Data.xlsx on the Student Companion Site. Click the appropriate worksheet tab as noted in the problem ( e.g. Prob. 9-12, etc.) to access the data. We also recommend using the ASQ Learn about Quality Excel templates noted in this chapter to facilitate your solutions to appropriate problems.
Verasource Microprocessor Corporation (VMC) sells 2,000 specialized microprocessor chips each month at a price of $1,500 each. Variable costs amount to $1,500,000, and fixed costs are $500,000. Currently the company has a defect rate of 8 percent (which are chips returned by customers, scrapped by VMC, and replaced). Note that the variable costs include the cost of producing the defective chips.
a. What is the hidden cost to the company of making this rate of defectives instead of 2,000 good chips each month?
b. Suppose a Six Sigma effort can reduce the defects to a six-sigma level (assume for simplicity that the defective rate is essentially zero). What is the impact on profitability?