Compute the relative distribution of quality costs


Assignment:

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 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)

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Operation Management: Compute the relative distribution of quality costs
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