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At the beginning of year 1, Kare Company initiated a quality improvement program. Considerable effort was expended over two years to reduce the number of defective units produced. By the end of the second year, reports from the production manager revealed that scrap and rework had both decreased. The president of the company was pleased to hear of the success but wanted some assessment of the financial impact of the improvements. To make this assessment, the following financial data were collected for the two years. Year 1 Year 2 Sales $ 10,000,000 $ 10,000,000 Scrap 400,000 300,000 Rework 600,000 400,000 Product inspection 100,000 125,000 Product warranty 800,000 600,000 Quality training 40,000 80,000 Materials inspection 60,000 40,000 Required: a. Classify the costs as prevention, appraisal, internal failure, and external failure. b-1. Compute total quality cost as a percentage of sales for each of the two years. b-2. By how much has profit increased because of quality improvements between Year 1 and Year 2

Sagot :

Answer:

a. The costs can be classified as follows:

Prevention: Quality training

Appraisal: Product inspection and Material inspection

Internal Failure: Scrap and rework

External Failure: Product Warranty

b-1. We have:

Total quality cost as a percentage of sales for Year 1 = 1.60%

Total quality cost as a percentage of sales for Year 2 = 1.65%

b-2. Profit has increased by $295,000 because of quality improvements between Year 1 and Year 2.

Explanation:

a. Classify the costs as prevention, appraisal, internal failure, and external failure.

The costs can be classified as follows:

Prevention: Quality training

Appraisal: Product inspection and Material inspection

Internal Failure: Scrap and rework

External Failure: Product Warranty

b-1. Compute total quality cost as a percentage of sales for each of the two years.

Total quality cost as a percentage of sales = ((Product inspection + Material inspection) / Sales) * 100 ………………. (1)

Using equation (1), we have:

Total quality cost as a percentage of sales for Year 1 = (($100,000 + $60,000) / 10,000,000) * 100 = 1.60%

Total quality cost as a percentage of sales for Year 2 = (($125,000 + $40,000) / 10,000,000) * 100 = 1.65%

b-2. By how much has profit increased because of quality improvements between Year 1 and Year 2?

To calculate the profit associated to quality, only costs associated to quality are deducted from Sales as follows:

Profit associated to quality = Sales - Scrap - Rework - Product inspection - Materials inspection ……… (1)

Using equation (1), we have:

Profit associated to quality for Year 1 = $10,000,000 - $400,000 - $600,000 - $100,000 - $60,000 = $8,840,000

Profit associated to quality for Year 2 = $10,000,000 - $300,000 - $400,000 - $125,000 - $40,000 = $9,135,000

Therefore, we have:

Increase in profit because of quality improvements = Profit associated to quality for Year 2 - Profit associated to quality for Year 1 = $9,135,000 - $8,840,000 = $295,000

Therefore, profit has increased by $295,000 because of quality improvements between Year 1 and Year 2.

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