Problem : Quality Cost Performance Reporting
In 2015, Major Company initiated a full-scale, quality improvement program. At the end of the year, Jack Aldredge, the president, noted with some satisfaction that the defects per unit of product had dropped significantly compared to the prior year.
He was also pleased that relationships with suppliers had improved and defective materials had declined. The new quality training program was also well accepted by employees.
Of most interest to the president, however, was the impact of the quality improvements on profitability. To help assess the dollar impact of the quality improvements, the actual sales and actual quality costs for 2014 and 2015 are as follows by quality category:
2014 |
2015 |
| Sales |
$8,000,000 |
$10,000,000 |
| Appraisal costs: |
|
|
| Packaging inspection |
320,000 |
300,000 |
| product acceptance |
40,000 |
28,000 |
| Prevention costs: |
|
|
| qualtiy circles |
4,000 |
40,000 |
| design reviews |
2,000 |
20,000 |
| quality improvement project |
2,000 |
100,000 |
| Internal failure costs: |
|
|
| scrap |
280,000 |
240,000 |
| rework |
360,000 |
320,000 |
| yield losses |
160,000 |
100,000 |
| retesting |
200,000 |
160,000 |
| External failure costs: |
|
|
| returned materials |
160,000 |
160,000 |
| allowances |
120,000 |
140,000 |
| warranty |
400,000 |
440,000 |
All prevention costs are fixed (by discretion). Assume all other quality costs are unit-level variable.
Required:
1. Compute the relative distribution of quality costs for each year and prepare a pie chart.
2. Prepare a one-year trend performance report for 2015 (compare the actual costs of 2015 with those of 2014, adjusted for differences in sales volume). How much have profits increased because of the quality improvements made by Major Company?
3. Estimate the additional improvement in profits if Major Company ultimately reduced its quality costs to 2.5 percent of sales revenues (assume sales of $10 million)