Paper Products Division produces paper diapers, napkins, and paper towels. The divi- sional manager has decided that quality costs can be minimized by distributing quality costs evenly among the four quality categories and reducing them to no more than 5 percent of sales. He has just received the following quality cost report: Paper Products Division Quality Cost Report For the Year Ended December 31, 2008 Diapers Napkins Towels Total Prevention: Quality training $ 3,000 $ 2,500 $ 2,000 $ 7,500 Quality engineering 3,500 1,000 2,500 7,000 Quality audits — 500 1,000 1,500 Quality reporting 2,500 2,000 1,000 5,500 Total $ 9,000 $ 6,000 $ 6,500 $ 21,500 (Continued) Appraisal: Diapers Napkins Towels Total Inspection, materials $ 2,000 $ 3,000 $ 3,000 $ 8,000 Process acceptance 4,000 2,800 1,200 8,000 Product acceptance 2,000 1,200 2,300 5,500 Total $ 8,000 $ 7,000 $ 6,500 $ 21,500 Internal failure: Scrap $ 10,000 $ 3,000 $ 2,500 $ 15,500 Disposal costs 7,000 2,000 1,500 10,500 Downtime 1,000 1,500 2,500 5,000 Total $18,000 $ 6,500 $ 6,500 $ 31,000 External failure: Allowances $ 10,000 $ 3,000 $ 2,750 $ 15,750 Customer complaints 4,000 1,500 3,750 9,250 Product liability 1,000 — — 1,000 Total $15,000 $ 4,500 $ 6,500 $ 26,000 Total quality costs $50,000 $24,000 $26,000 $100,000 Assume that all prevention costs are fixed and that the remaining quality costs are variable. Required 1. Assume that the sales revenue for the year totaled $2 million, with sales for each product as follows: diapers, $1 million; napkins, $600,000; and towels, $400,000. Evaluate the distribution of costs for the division as a whole and for each prod- uct line. What recommendations do you have for the divisional manager? 2. Now, assume a different scenario, where total sales of $1 million have this break- down: diapers, $500,000; napkins, $300,000; and towels, $200,000. Evaluate the distribution of costs for the division as a whole and for each product line in this case. Do you think it is possible to reduce the quality costs to 5 percent of sales for each product line and for the division as a whole and, simultaneously, achieve an equal distribution of the quality costs? What recommendations do you have? 3. Assume total sales of $1 million with this breakdown: diapers, $500,000; nap- kins, $180,000; and towels, $320,000. Evaluate the distribution of quality costs. What recommendations for the divisional manager do you have? 4. Discuss the value of having quality costs reported by segment.
Paper Products Division produces paper diapers, napkins, and paper towels. The divi- sional manager has decided that quality costs can be minimized by distributing quality costs evenly among the four quality categories and reducing them to no more than 5 percent of sales. He has just received the following quality cost report:
Paper Products Division Quality Cost Report
For the Year Ended December 31, 2008
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| Diapers | Napkins | Towels | Total |
| Prevention: Quality training |
$ 3,000 |
$ 2,500 |
$ 2,000 |
$ 7,500 |
| Quality engineering | 3,500 | 1,000 | 2,500 | 7,000 |
| Quality audits | — | 500 | 1,000 | 1,500 |
| Quality reporting | 2,500 | 2,000 | 1,000 | 5,500 |
| Total | $ 9,000 | $ 6,000 | $ 6,500 | $ 21,500 |
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| (Continued) |
Appraisal:
Diapers Napkins Towels Total
Inspection, materials $ 2,000 $ 3,000 $ 3,000 $ 8,000
Process acceptance 4,000 2,800 1,200 8,000 Product acceptance 2,000 1,200 2,300 5,500 Total $ 8,000 $ 7,000 $ 6,500 $ 21,500 Internal failure:
| Scrap | $ 10,000 | $ 3,000 | $ 2,500 | $ 15,500 |
| Disposal costs | 7,000 | 2,000 | 1,500 | 10,500 |
| Downtime | 1,000 | 1,500 | 2,500 | 5,000 |
| Total | $18,000 | $ 6,500 | $ 6,500 | $ 31,000 |
| External failure: |
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| Allowances | $ 10,000 | $ 3,000 | $ 2,750 | $ 15,750 |
| Customer complaints | 4,000 | 1,500 | 3,750 | 9,250 |
| Product liability | 1,000 | — | — | 1,000 |
| Total | $15,000 | $ 4,500 | $ 6,500 | $ 26,000 |
| Total quality costs | $50,000 | $24,000 | $26,000 | $100,000 |
Assume that all prevention costs are fixed and that the remaining quality costs are variable.
Required
1. Assume that the sales revenue for the year totaled $2 million, with sales for each product as follows: diapers, $1 million; napkins, $600,000; and towels, $400,000. Evaluate the distribution of costs for the division as a whole and for each prod- uct line. What recommendations do you have for the divisional manager?
2. Now, assume a different scenario, where total sales of $1 million have this break- down: diapers, $500,000; napkins, $300,000; and towels, $200,000. Evaluate the distribution of costs for the division as a whole and for each product line in this case. Do you think it is possible to reduce the quality costs to 5 percent of sales for each product line and for the division as a whole and, simultaneously, achieve an equal distribution of the quality costs? What recommendations do you have?
3. Assume total sales of $1 million with this breakdown: diapers, $500,000; nap- kins, $180,000; and towels, $320,000. Evaluate the distribution of quality costs. What recommendations for the divisional manager do you have?
4. Discuss the value of having quality costs reported by segment.
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