QualityHW03

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Quinsigamond Community College *

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FIN 111-01

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Management

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Feb 20, 2024

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Homework 3 1.Backwoods American, Inc., produces expensive water-repellant, down-lined parkas. The company implemented a total quality management program in 1993. The following are quality- related accounting data that have been accumulated for the past five-year period, or one year prior to the program’s start. a. Compute the company’s total failure costs as a percentage of total quality costs for each of the five years. Does there appear to be a trend to this result? If so, speculate on what might have caused the trend Total failure cost as a percentage of total quality costs. Solution: Year Total Failure Cost Total Quality Cost Failure Cost (%) 1992 157.7 187.2 84.27% 1993 161.8 201.7 80.22% 1994 153.6 212.5 72.23% 1995 127.2 194 65.58% 1996 97.3 166.9 58.32% Analyzing the results: There seems to be a decreasing trend in the percentage of total failure costs over the five- year period. The percentage decreases from 84.27% in 1992 to 58.32% in 1996. Possible reasons for this trend could include improvements in quality control measures, the effectiveness of the total quality management program implemented in 1993, or other initiatives aimed at reducing failure costs.

b. Compute prevention costs and appraisal costs, each as a percentage of total costs, during each of the five years. Speculate on what the company’s quality strategy appears to be. Solution: Year Prevention Cost Appraisal Cost Prevention Cost (%) Appraisal cost % 1992 3.2 26.3 1.71% 14.04% 1993 10.7 29.2 5.30% 14.47% 1994 28.3 30.6 13.31% 14.41% 1995 42.6 24.1 21.86% 12.42% 1996 50.0 19.6 29.95% 11.73% It seems that Backwoods American, Inc. first prioritized preventive efforts in 1993, as shown by a notable increase in the company's preventive Cost Percentage, based on patterns in quality expenses over time. This calculated action fits well with a proactive quality management strategy that emphasizes process improvement and defect prevention. The corporation may have effectively implemented improvements and efficiencies, nevertheless, as seen by the following decline in the Prevention Cost Percentage from 1994 to 1996, which led to a decrease in the resources devoted to prevention initiatives. This change may be a sign that the quality management program is maturing and that the early efforts to prevent defects have paid off, making a more economical strategy for sustaining product quality. c. Compute quality-sales indices and quality-cost indices for each of the five years. Is it possible to assess the effectiveness of the company’s quality management program from these index values? Solution: Quality-Sales Indices (QSI) and Quality-Cost Indices (QCI) for each of the five years: Year Quality-Sales Index (QSI) Quality-Cost Index (QCI) 1992 6.93% 44.47% 1993 7.49% 47.65% 1994 7.86% 49.99%

1995 6.90% 44.50% 1996 5.79% 38.35% Yes, the Quality-Sales Index (QSI) and Quality-Cost Index (QCI) provide quantitative measures to assess Backwoods American, Inc.'s commitment to quality. A higher QSI denotes a commitment to product excellence and implies a significant sales revenue allocation to quality costs. On the other hand, a lower QSI can suggest economical quality control, which needs to be carefully considered to make sure it doesn't lower product quality. A lower QCI indicates that quality costs are efficiently allocated within manufacturing expenses, whereas a greater QCI indicates that sustaining good product quality requires a substantial investment. These indices should be taken into account in conjunction with qualitative elements, market trends, and industry standards to provide a thorough evaluation of the efficacy of the company's quality management system. d. List several examples of each quality-related cost – that is, prevention, appraisal, and internal and external failure – that might result from the production of parka. Solution: Here are some examples of each quality-related cost (prevention, appraisal, internal failure, and external failure) that might result from the production of parka: Prevention Costs: Employee training programs on quality control and manufacturing processes. Investment in innovative production technologies to decrease defects. Implementation of a strong supplier qualification and quality assurance program. Appraisal Costs: Calibration and maintenance of testing equipment. Cost of hiring and training quality control inspectors. Customer satisfaction surveys and feedback analysis. Internal Failure Costs: Scrap costs for materials that need to be discarded due to defects. Cost of machine downtime and production delays caused by internal defects. Overtime and additional labor costs to correct internal failures.

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External Failure Costs: Returns and replacements requested by customers due to defects. Customer complaints and associated support costs. 2. The Backwoods American company in problem 1 produces approximately 20, 000 parkas annually. The quality management program the company implemented was able to improve the average percentage of good parkas produced by 2% each year, beginning with 83% good-quality parkas in 1992. Only about 20% of poor-quality parkas can be reworked. a. Compute the product yield for each of the five years. Solution: Year Production Yield (%) 1992 66.40% 1993 68.06% 1994 69.72% 1995 71.38% 1996 73.04% b. Using a rework cost of $12 per parka, determine the manufacturing cost per good parka for each of the five years. What do these results imply about the company’s quality management program? Solution: Year Manufacturing Cost per Good Parka ($) 1992 $34.16 1993 $33.96 1994 $33.84 1995 $33.84 1996 $33.94 For the company's quality management program: Consistency in Manufacturing Cost:

Over the course of the five years, there have been only minor fluctuations in the manufacturing cost per good parka. This consistency shows that the business has been able to successfully manage and control the manufacturing expenses related to creating high-quality parkas. Efficiency in Rework Process: The rework cost, which is part of the manufacturing cost per good parka, reflects the cost of correcting poor-quality parkas. The effectiveness of the company's quality management program in reducing defects and guaranteeing that reworked parkas contribute to keeping a low overall cost per excellent parka is demonstrated by the efficiency with which it has maintained a comparatively low rework cost. Cost Reduction over Time: Over time, there has been a modest decline in the manufacturing cost per parka. This pattern can suggest that the business has successfully reduced costs by utilizing economies of scale, enhanced procedures, or other cost-cutting strategies related to its quality control program. Positive Impact on Profitability: The profitability of the business is positively impacted by the capacity to maintain stable or declining manufacturing costs for high-quality parkas. It implies that the quality management program helps ensure cost-effectiveness, which can have a good effect on the company's financial performance, in addition to being effective in guaranteeing product quality. 3. The Backwoods American company operates a telephone order system for a catalog of its outdoor clothing products. The catalog orders are processed in three stages. In the first stage the telephone operator enters the order into the computer; in the second stage the items are secured and batched in the warehouse; and in the final stage the ordered products are packaged. Errors can be made in orders at any of these stages, and the average percentage of errors that occurs at each stage are as follows. Solution:

 Errorless Percentage (1): 100%−12%=88%  Errorless Percentage (2): 100%−8%=92%  Errorless Percentage (3): 100%−4%=9=96%  Cumulative Errorless Percentage=0.88×0.92×0.96  Number of Errorless Orders=Cumulative Errorless Percentage×320 Number of Errorless Orders=0.88×0.92×0.96×320 Number of Errorless Orders≈249. 4. Airphone, Inc. manufactures cellular telephones at a processing cost of $47 per unit. The company produces an average of 250 phones per week and has a yield of 87% good-quality phones, resulting in 13% defective phones, all of which can be reworked. The cost of reworking a defective telephone is $16. a. Compute the quality-productivity ratio (QPR) Solution: Number of Good Units≈250×0.87 Total Processing Cost≈250×$47 QPR = number of Good Units /Total Processing Cost = 0.0185 b. Compute the QPR if the company increased the production rate to 320 phones per week while reducing the processing cost to $42, reducing the rework cost to $12, and increasing the product yield of good-quality telephones to 94%. Solution: Increased production per week: 320 phones - Processing cost per unit: $42 - Rework cost per defective unit: $12 - Increased yield of good-quality phones: 94% Number of Good Units (New)≈320×0.94 Total Processing Cost (New)≈320×$42 QPR (new) = 300.8 / $17,280 ≈ 0.02

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