Assignment: Discussion-Cost of Quality
Using this case study, take the role of the production manager and prepare a report for the board that either recommends the proposed changes or does not recommend the changes. Support your position with details from the case and also from information from the text or other outside references.
Make sure your original answer explains the following in your own words:
• Cost of Quality
• Total Quality Management (TQM)
• Statistical Process Control (SPC)
• Six Sigma
• Relevant Costs
• Sunk Costs
• Cost Volume Profit (CVP).
Case Study:
Case study question: Swift Airlines Swift Airlines has a daily return flight from London to Nice. The aircraft for the flight has a capacity of 120 passengers. Swift sells its tickets at a range of prices. Its business plan works on the basis of the following mix of ticket prices for each day's flight:
|
Business
|
30 @ £300
|
£9,000
|
|
Economy regular
|
40 @ £200
|
£8,000
|
|
Advance purchase
|
20 @ £120
|
£2,400
|
|
7-day-purchase
|
20 @ £65
|
£1,300
|
|
Stand-by
|
10 @ £30
|
£300
|
|
Revenue
|
120
|
£21,000
|
Swift's head office accounting department has calculated its costs as follows:
Cost per passenger (to cover additional fuel, insurance, baggage handling etc.) assuming full load £25 per passenger
Flight costs (to cover aircraft lease, flight and cabin crew costs, airport and landing charges etc.) £3,000 (120 @ £25) £7,500 per flight
Route costs (to cover the support needed for each destination) £2,000 (based on ½ of the daily cost of £4,000 (balance charged to return flight)) Business overhead £3,000 (allocation of head office overhead)
Total £15,500
This results in a budgeted profit of £5,500 per flight, assuming that all seats are sold at the budgeted price. The head office accountant for European routes has advised the route manager for Nice that while the Nice-London inbound leg is breaking even, losses are being made on the London-Nice outbound leg. If profits cannot be generated, the route may need to be closed, with the aircraft and crew being assigned to another route. The route manager for Nice has extracted recent sales figures, a typical flight having the following sales mix:
|
% of tickets sold Business
|
60
|
18 @ £300
|
£5,400
|
|
Economy regular
|
70
|
28 @ £200
|
£5,600
|
|
Advance purchase
|
80
|
16 @ £120
|
£1,920
|
|
7-day purchase
|
75
|
15 @ £65
|
£975
|
|
Stand-by
|
100
|
10 @ £30
|
£300
|
|
Revenue
|
87
|
|
£14,195
|
The route manager has calculated a loss on each outbound flight of £1,305. She believes that there is a market for 48-hour ticket purchases if a new fare of £40 was introduced, as this would be £5 less than the price charged by a competitor for the same ticket. She estimates that she could sell 15 seats per flight on this basis. This would not affect either the 7-day purchase, which is used by business travelers, or stand-by fares, which are usually oversubscribed. The additional revenue of £600 (15 @ £40) would cover almost half the loss. The route manager has prepared a report for her manager asking that the new fare be approved and allowing her three months to prove that the new tickets could be sold. Comment on the route manager's proposal. Case studies provide the reader with the opportunity to interpret and analyze financial information produced by an accountant for use by non-accounting managers in decision-making. There is a suggested answer for the case in Part IV, although the nature of case studies is that there is rarely a single correct answer, as different approaches to the problem can highlight different aspects of the case and a range of possible approaches are possible.