Question:
QUALITY COST PERFORMANCE REPORTING: ONE-YEAR TREND, LONG-RANGE ANALYSIS
In 2007, 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 the actual quality costs for 2006 and 2007 are as follows by quality category:
|
|
2006
|
2007
|
|
Sales
|
$8,000,000
|
$10,000,000
|
|
Appraisal costs:
|
|
|
|
Packaging inspection
|
320,000
|
300,000
|
|
Product acceptance
|
40,000
|
28,000
|
|
Prevention costs:
|
|
|
|
Quality circles
|
4,000
|
40,000
|
|
Design reviews
|
2,000
|
20,000
|
|
Quality improvement projects
|
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 unitlevel variable.
Required:
1. Compute the relative distribution of quality costs for each year. Do you believe that the company is moving in the right direction in terms of the balance among the quality cost categories? Explain.
2. Prepare a 1-year trend performance report for 2007 (compare the actual costs of 2007 with those of 2006, 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 reduces its quality costs to 2.5 percent of sales revenues (assume sales of $25 million).