Ames' Ambulance Services Ltd. had sales of $26,000,000 in 2012. In 2015, sales had increased to $28,000,000. A quality improvement program was implemented at the beginning of 2014. Overall control (prevention and appraisal) quality was targeted for improvement. The quality costs for 2012 and 2015 follow. Assume any changes in costs are attributable to improvements in quality.
|
2012
|
|
2015
|
|
Internal failure costs
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$3,650,000
|
|
$363,500
|
|
External failure costs
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2,226,000
|
|
89,000
|
|
Appraisal costs
|
968,000
|
|
564,000
|
|
Prevention costs
|
702,000
|
|
379,000
|
|
Total quality costs
|
7,546,000
|
|
1,395,500
|
Required:
a. Compute the quality costs-to-sales ratio for each year.
b. Calculate and compare the relative distribution of costs by category for 2012 and 2015. What conclusions do you draw from this comparison? Are further reductions possible?
c. The quality manager argued that the 2015 external costs were much higher than reported and that additional investment ought to be made to prevention and appraisal costs. Discuss the validity of his viewpoint.