Assignment Material

Questions

1. 20-1. Describe two benefits of improving quality.
2. 20-2. How does conformance quality differ from design quality? Explain.
3. 20-3. Name two items classified as prevention costs.
4. 20-4. Give two examples of appraisal costs.
5. 20-5. Distinguish between internal failure costs and external failure costs.
6. 20-6. Describe three methods that companies use to identify quality problems.
7. 20-7. “Companies should focus on financial measures of quality because these are the only measures of quality that can be linked to bottom-line performance.” Do you agree? Explain.
8. 20-8. Give two examples of nonfinancial measures of customer satisfaction relating to quality.
9. 20-9. Give two examples of nonfinancial measures of internal-business-process quality.
10. 20-10. “When evaluating alternative ways to improve quality, managers need to consider the fully allocated costs of quality.” Do you agree? Explain.
11. 20-11. Distinguish between customer-response time and manufacturing cycle time.
12. 20-12. “There is no tradeoff between customer-response time and on-time performance.” Do you agree? Explain.
13. 20-13. Give two reasons why delays occur.
14. 20-14. “When evaluating a company’s performance on the time dimension, managers should only consider financial measures.” Do you agree? Explain.
15. 20-15. What are the advantages of nonfinancial measures of quality?

Multiple-Choice Questions

1. 20-16. Rector Corporation is examining its quality control program. Which of the following statements is/are correct?
   1. I. Rework costs should be regarded as a cost of quality when the rework is caused by internal failure.
   2. II. Prevention costs are costs that are incurred to prevent the sale and production of defective units.
   3. III. Internal failure costs are costs of failure of machinery on the production line.
2. 1. I, II, and III are correct.
3. 2. II only is correct.
4. 3. I and III only are correct.
5. 4. I only is correct.

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Exercises

1. 20-17. COSTS OF QUALITY. (CMA, adapted) Osborn, Inc., produces cell phone equipment. Amanda Westerly, Osborn’s president, implemented a quality-improvement program that has now been in operation for 2 years. The cost report shown here has recently been issued.

1. 1. Required
   2. 1. For each period, calculate the ratio of each COQ category to revenues and to total quality costs.
   3. 2. Based on the results of requirement 1, would you conclude that Osborn’s quality program has been successful? Prepare a short report to present your case.
   4. 3. Based on the 2018 survey, Amanda Westerly believed that Osborn had to improve product quality. In making her case to Osborn management, how might Westerly have estimated the opportunity cost of not implementing the quality-improvement program?
2. 20-18. COSTS OF QUALITY ANALYSIS. Teton Company makes chairs for outside living spaces. The company has been working on improving quality over the last year and wants to evaluate how well it has done on costs-of-quality (COQ) measures. Here are the results:

1. 1. Required
   2. 1. Identify the costs-of-quality category (prevention, appraisal, internal failure, and external failure) for each of these costs.
   3. 2. Prepare a COQ report by calculating the costs of quality for each category and the ratio of each COQ category to revenues and total quality costs.
   4. 3. Based on the results of requirement 2, would you conclude that Teton’s quality program has been successful? Prepare a short report to present your case.
2. 20-19. COSTS-OF-QUALITY ANALYSIS. Safe Travel produces car seats for children from newborn to 2 years old. Safe Travel’s only problem with its car seats was stitching in the straps. The problem can usually be detected and repaired during an internal inspection. Inspection costs $5.00 per car seat, and repairs cost $1.00 per car seat. All 200,000 car seats were inspected last year, and 5% were found to have problems with the stitching. Another 1% of the 200,000 car seats had problems with the stitching, but the internal inspection did not discover them. Defective units that were sold and shipped to customers are shipped back to Safe Travel and repaired. Shipping costs are $8.00 per car seat, and repair costs are $1.00 per car seat. Negative publicity will result in a loss of future contribution margin of $100 for each external failure.
   1. Required
   2. 1. Identify total costs of quality by category (appraisal, internal failure, and external failure).
   3. 2. Safe Travel is concerned with the high up-front cost of inspecting all 200,000 units. Managers are considering an alternative internal inspection plan that will cost only $3.00 per car seat inspected. During the internal inspection, the alternative technique will detect only 3.5% of the 200,000 car seats that have stitching problems. The other 2.5% will be detected after the car seats are sold and shipped. What are the total costs of quality for the alternative technique?
   4. 3. What factors other than cost should Safe Travel consider before changing inspection techniques?
3. 20-20. COSTS OF QUALITY, QUALITY IMPROVEMENT. iCover produces bags for carrying laptop computers. iCover sells 1,000,000 units each year at a price of $20 per unit and a contribution margin of 40%.
4. To respond to customer complaints, iCover’s mangers want to modify the production processes to produce higher-quality products.
5. The current costs of quality are as follows:

1. The management accountant has forecast the following additional costs to modify the production process.

1. 1. Required
   2. 1. Which costs-of-quality category are managers focusing on? Why?
   3. 2. If the improvements result in a 55% decrease in product repair costs and a 70% decrease in lost sales from customer returns, what is the impact on the overall COQ and the company’s operating income? What should iCover do? Explain.
   4. 3. Calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs and as a percentage of sales before and after the change in the production process. Comment briefly on your results.

1. 20-21. QUALITY IMPROVEMENT, RELEVANT COSTS, RELEVANT REVENUES. SpeedPrint manufactures and sells 18,000 high-technology printing presses each year. The variable and fixed costs of rework and repair are as follows: 

1. Time Drivers and BottlenecksSpeedPrint’s current presses have a quality problem that causes variations in the shade of some colors. Its engineers suggest changing a key component in each press. The new component will cost $70 more than the old one. In the next year, however, SpeedPrint expects that with the new component it will (1) save 14,000 hours of rework, (2) save 850 hours of customer support, (3) move 225 fewer loads, (4) save 8,000 hours of warranty repairs, and (5) sell an additional 140 printing presses, for a total contribution margin of $1,680,000. SpeedPrint believes that even as it improves quality, it will not be able to save any of the fixed costs of rework or repair. SpeedPrint uses a 1-year time horizon for this decision because it plans to introduce a new press at the end of the year.
   1. Required
   2. 1. Should SpeedPrint change to the new component? Show your calculations.
   3. 2. Suppose the estimate of 140 additional printing presses sold is uncertain. What is the minimum number of additional printing presses that SpeedPrint needs to sell to justify adopting the new component?
   4. 3. What other factors should managers at SpeedPrint consider when making their decision about changing to a new component?
2. 20-22. QUALITY IMPROVEMENT, RELEVANT COSTS, RELEVANT REVENUES. Bloom Floral offers a special-priced arrangement for holidays and business increases significantly during these specials. Cathy, the owner of Bloom, guarantees customer satisfaction and charges $50 for these arrangement specials.
3. Bloom receives orders for 1,000 of these arrangement specials for Mother’s Day. Typically, 30% of these arrangements have to be reworked by Cathy to assure customer satisfaction. Each rework by Cathy costs approximately $8 per arrangement.
4. Cathy believes that the rework problem could be significantly reduced if she holds a short training before each special-priced arrangement holiday. The expected cost of this training would be $100 per holiday. Cathy expects this training would reduce sales by 20 arrangements but would reduce Cathy’s rework to only 5% of the arrangements.
   1. Required
   2. 1. Should Bloom Floral implement Cathy’s idea? Show your calculations.
   3. 2. What nonfinancial and qualitative factors should Bloom Floral consider in deciding whether to implement the new plan?
5. 20-23. WAITING TIME. It’s a Dog’s World (IDW) makes toys for big-breed puppies. IDW’s managers have recently learned that they can calculate the average waiting time for an order from the time an order is received till the time manufacturing starts. They have asked for your help and have provided the following information.
6. Expected number of orders for the product: 3,200
7. Manufacturing time per order: 5 hours
8. Annual machine capacity in hours: 18,000
   1. Required
   2. 1. Calculate the average waiting time per order.
   3. 2. After learning about the average waiting time, IDW’s managers are confused. They do not understand why, if annual machine capacity is greater than the average number of orders for the product, there would be any waiting time at all. Write a memo to clarify the situation.
   4. 3. The managers have asked for your suggestions on what they can do to minimize or eliminate waiting time. How would you respond?

1. 20-24. WAITING TIME, SERVICE INDUSTRY. The registration advisors at a small Midwestern college (SMC) help 6,000 students develop their class schedules and register for classes each semester. Each advisor works for 10 hours a day during the registration period. SMC currently has 15 advisors. While advising an individual student can take anywhere from 2 to 30 minutes, it takes an average of 12 minutes per student. During the registration period, the 15 advisors see an average of 500 students a day on a first-come, first-served basis.
   1. Required
   2. 1. Using the formula from section Time Drivers and Bottlenecks, calculate how long the average student will have to wait in the advisor’s office before being advised.
   3. 2. The head of the registration advisors would like to increase the number of students seen each day because at 500 students a day it would take 12 working days to see all of the students. This is a problem because the registration period lasts for only 2 weeks (10 working days). If the advisors could advise 600 students a day, it would take only 2 weeks (10 days). However, the head advisor wants to make sure that the waiting time is not excessive. What would be the average waiting time if 600 students were seen each day?
   4. 3. SMC wants to know the effect of reducing the average advising time on the average wait time. If SMC can reduce the average advising time to 10 minutes, what would be the average waiting time if 600 students were seen each day?
2. 20-25. WAITING TIME, COST CONSIDERATIONS, CUSTOMER SATISFACTION (CONTINUATION OF 20-24). Refer to the information presented in Exercise 20-24. The head of the registration advisors at SMC has decided that the advisors must finish their advising in 2 weeks (10 working days) and therefore must advise 600 students a day. However, the average waiting time, given a 12-minute advising period, will result in student complaints, as will reducing the average advising time to 10 minutes. SMC is considering two alternatives:
   1. a. Hire two more advisors for the 2-week (10-working-day) advising period. This will increase the available number of advisors to 17 and therefore lower the average waiting time.
   2. b. Increase the number of days that the advisors will work during the 2-week registration period to 6 days a week. If SMC increases the number of days worked to 6 per week, then the 15 advisors need only see 500 students a day to advise all of the students in 2 weeks.
   3. Required
   4. 1. What would the average wait time be under alternative A and under alternative B?
   5. 2. If advisors earn $100 per day, which alternative would be cheaper for SMC (assume that if advisors work 6 days in a given workweek, they will be paid time and a half for the sixth day)?
   6. 3. From a student satisfaction point of view, which of the two alternatives would be preferred? Why?
3. 20-26. NONFINANCIAL MEASURES OF QUALITY AND TIME. For the past 2 years, Worldwide Cell Phones has been working to improve the quality of its phones. Data for 2019 and 2020 follows (in thousands of phones):

1. 1. Required
   2. 1. For each year, 2019 and 2020, calculate the following:
      1. a. Percentage of defective units shipped
      2. b. Customer complaints as a percentage of units shipped
      3. c. Percentage of units reworked during production
      4. d. Manufacturing cycle time as a percentage of total time from order to delivery
   3. 2. Referring to the information computed in requirement 1, explain whether Worldwide Cell Phones’ quality and timeliness have improved.

1. 20-27. NONFINANCIAL MEASURES OF QUALITY, MANUFACTURING CYCLE EFFICIENCY. (CMA, adapted) Turnkey Manufacturing evaluates the performance of its production managers based on a variety of factors, including cost, quality, and cycle time. The following are nonfinancial measures for quality and time for 2019 and 2020 for its only product:

1. The following information relates to the average amount of time needed to complete an order:

1. 1. Required
   2. 1. Compute the manufacturing cycle efficiency for an order for 2019 and 2020.
   3. 2. For each year, 2019 and 2020, calculate the following:
      1. a. Percentage of goods returned
      2. b. Defective units reworked as a percentage of units shipped
      3. c. Percentage of on-time deliveries
      4. d. Percentage of hours spent by each employee on quality training
   4. 3. Evaluate management’s performance on quality and timeliness in 2019 and 2020.

Problems

1. 20-28. STATISTICAL QUALITY CONTROL. Harvest Cereals produces a wide variety of breakfast products. The company’s three best-selling breakfast cereals are Double Bran Bits, Honey Wheat Squares, and Sugar King Pops. Each box of a particular type of cereal is required to meet predetermined weight specifications, so that no single box contains more or less cereal than another. The company measures the mean weight per production run to determine whether there are variances over or under the company’s specified upper-and lower-level control limits. A production run that falls outside of the specified control limit does not meet quality standards and is investigated further by management to determine the cause of the variance. The three Harvest breakfast cereals had the following weight standards and production run data for the month of March:

1. 1. Required
   2. 1. Using the $\mu \pm 2\sigma$ rule, what variance investigation decisions would be made?
   3. 2. Present control charts for each of the three breakfast cereals for March. What inferences can you draw from the charts?
   4. 3. What are the costs of quality in this example?
2. 20-29. QUALITY IMPROVEMENT, PARETO DIAGRAM, CAUSE-AND-EFFECT DIAGRAM. Pauli’s Pizza has recently begun collecting data on the quality of its customer order processing and delivery. Pauli’s made 1,800 deliveries during the first quarter of 2020. The following quality data pertain to first-quarter deliveries:

1. 1. Required
   2. 1. Draw a Pareto diagram of the quality failures experienced by Pauli’s Pizza.
   3. 2. Give examples of prevention activities that could reduce the failures experienced by Pauli’s.
   4. 3. Draw a cause-and-effect diagram of possible causes for late deliveries.
2. 20-30. QUALITY IMPROVEMENT, RELEVANT COSTS, AND RELEVANT REVENUES. The Brady Corporation sells 375,000 V262 valves to the automobile and truck industry. Brady has a capacity of 210,000 machine-hours and can produce two valves per machine-hour. V262’s contribution margin per unit is $9. Brady sells only 375,000 valves because 45,000 valves (12% of the good valves) need to be reworked. It takes one machine-hour to rework two valves, so 22,500 hours of capacity are used in the rework process. Brady’s rework costs are $315,000. Rework costs consist of the following:
   1. • Direct materials and direct rework labor (variable costs): $3 per unit
   2. • Fixed costs of equipment, rent, and overhead allocation: $4 per unit
3. Brady’s process designers have developed a modification that would maintain the speed of the process and ensure 100% quality and no rework. The new process would cost $523,000 per year. The following additional information is available:
   1. • The demand for Brady’s V262 valves is 440,000 per year.
   2. • The Mason Corporation has asked Brady to supply 19,000 T971 valves (another product) if Brady implements the new design. The contribution margin per T971 valve is $9. Brady can make one T971 valve per machine-hour with 100% quality and no rework.
      1. Required
      2. 1. Suppose Brady’s designers implement the new design. Should Brady accept Mason’s order for 19,000 T971 valves? Show your calculations.
      3. 2. Should Brady implement the new design? Show your calculations.
      4. 3. What nonfinancial and qualitative factors should Brady consider in deciding whether to implement the new design?

1. 20-31. QUALITY IMPROVEMENT, RELEVANT COSTS, AND RELEVANT REVENUES. The Azure Corporation uses multicolor molding to make plastic lamps. The molding operation has a capacity of 220,000 units per year. The demand for lamps is very strong. Azure will be able to sell whatever output quantities it can produce at $35 per lamp.
2. Azure can start only 220,000 units into production in the molding department because of capacity constraints on the molding machines. If a defective unit is produced at the molding operation, it must be scrapped at a net disposal value of zero. Of the 220,000 units started at the molding operation, 44,000 defective units (20%) are produced. The cost of a defective unit, based on total (fixed and variable) manufacturing costs incurred up to the molding operation, equals $26 per unit, as follows:

1. Azure’s designers have determined that adding a different type of material to the existing direct materials would result in no defective units being produced, but it would increase the variable costs by $11 per lamp in the molding department.
   1. Required
   2. 1. Should Azure use the new material? Show your calculations.
   3. 2. What nonfinancial and qualitative factors should Azure consider in making the decision?
2. 20-32. WAITING TIMES, MANUFACTURING CYCLE TIMES. The Shipley Corporation uses an injection molding machine to make a plastic product, P25, after receiving firm orders from its customers. Shipley estimates that it will receive 100 orders for P25 during the coming year. Each order of P25 will take 80 hours of machine time. The annual machine capacity is 9,000 hours.
   1. Required
   2. 1. Calculate (a) the average amount of time that an order for P25 will wait in line before it is processed and (b) the average manufacturing cycle time per order for P25.
   3. 2. Shipley is considering introducing a new product, Q19. The company expects it will receive 25 orders of Q19 in the coming year. Each order of Q19 will take 20 hours of machine time. Assuming the demand for P25 will not be affected by the introduction of Q19, calculate (a) the average waiting time for an order received and (b) the average manufacturing cycle time per order for each product, if Shipley introduces Q19.
3. 20-33. WAITING TIMES, RELEVANT REVENUES, AND RELEVANT COSTS (CONTINUATION OF 20-32). Shipley is still debating whether it should introduce Q19. The following table provides information on selling prices, variable costs, and inventory carrying costs for P25 and Q19:

1. Required
2. Using the average manufacturing cycle times calculated in Problem 20-32, should Shipley manufacture and sell Q19? Show your calculations and briefly explain your reasoning.
3. 20-34. MANUFACTURING CYCLE TIMES, RELEVANT REVENUES, AND RELEVANT COSTS. The DJ Corporation makes custom specified wire harnesses for the trucking industry only upon receiving firm orders from its customers. DJ has recently purchased a new machine to make two types of wire harnesses, one for Peterbilt and the other for Kenworth. The annual capacity of the new machine is 5,000 hours. The following information is available for next year:

1. 1. Required
   2. 1. Calculate the average manufacturing cycle times per order (a) if DJ manufactures only Peterbilt and (b) if DJ manufactures both Peterbilt and Kenworth.
   3. 2. Even though Kenworth has a positive contribution margin, DJ’s managers are evaluating whether DJ should (a) make and sell only Peterbilt or (b) make and sell both Peterbilt and Kenworth. Which alternative will maximize DJ’s operating income? Show your calculations.
   4. 3. What other factors should DJ consider in choosing between the alternatives in requirement 2?
2. 20-35. QUALITY IMPROVEMENT, RELEVANT COSTS, RELEVANT REVENUES. American Electronics manufactures 200,000 55-inch 4K TVs each year. The variable and fixed costs of rework and repair for the TVs are as follows:

1. American Electronics’ 55-inch 4K TVs have a quality problem that causes shadows in the picture. Its engineers suggest changing a key component in each TV. The new component will cost $22 more than the old one. In the next year, however, American Electronics expects that with the new component it will (1) save 10,000 hours of rework, (2) save 1,000 hours of customer support, (3) move 300 fewer loads, (4) save 10,000 hours of warranty repairs, and (5) sell an additional 2,000 4K TVs, for a total additional contribution margin of $2,200,000. American Electronics believes that even as it improves quality, it will not be able to save any of the fixed costs of rework or repair. American Electronics uses a 1-year time horizon for this decision because it plans to introduce a 5K TV at the end of the year.
   1. Required
   2. 1. Should American Electronics change to the new component? Show your calculations.
   3. 2. Suppose the estimate of 2,000 additional TVs sold is uncertain. What is the minimum number of additional TVs that American Electronics needs to sell to justify adopting the new component?
   4. 3. What other factors should managers at American Electronics consider when making their decision about changing to a new component?
2. 20-36. ETHICS AND QUALITY. Outmark Corporation manufactures computer processors for leading computer makers. Joe Agent is the management accountant for one of Outmark’s largest manufacturing plants. His bonus is based on the plant’s revenues. The plant’s general manager, Chris Levine, has just returned from a meeting at corporate headquarters where quality expectations were outlined for 2020. Chris calls Joe into his office to relay the corporate objective to minimize quality costs and that total quality costs will not exceed 8% of total revenues by plant under any circumstances. Chris asks Joe to provide him with a list of options for meeting corporate headquarters’ quality objective. The plant’s initial budgeted revenues and quality costs for 2020 are as follows:

1. For each processor sold at the current price, the contribution margin is positive. Prior to receiving the new corporate quality objective, Joe had collected information for all of the plant’s possible options for improving both product quality and costs of quality. He was planning to introduce the idea of reengineering the manufacturing process at a one-time cost of $135,000, which would decrease product inspection costs by approximately 28% per year and is expected to reduce warranty repairs and customer support by an estimated 46% per year. It would also allow the plant to produce and sell 5% more units.

1. After seeing the new corporate objective, Joe crunches the numbers again and comes up with another idea. By increasing the cost-of-quality control training for production staff by $35,000 per year, the plant would reduce product inspection costs by 16% annually and reduce warranty repairs and customer support costs by 28% per year as well. However, under this option, the plant wouldn’t be able to increase its production and sales.
   1. Required
   2. 1. Calculate the ratio of each budgeted costs-of-quality category (prevention, appraisal, internal failure, and external failure) to budgeted revenues for 2020. Are the budgeted total costs of quality as a percentage of budgeted revenues currently less than 8%?
   3. 2. Which of the two quality options should Joe propose to the general manager, Chris Levine? Show the impact on quality costs and revenues for the two options: (a) reengineer the manufacturing process for $135,000 and (b) increase quality training expenditure by $35,000 per year. Do the calculations using a 1-year time horizon.
   4. 3. Suppose Joe decides not to present the quality training option to Chris. Is Joe’s action unethical? Explain.
   5. 20-37. QUALITY IMPROVEMENT. Dover Corporation makes printed cloth in two departments: weaving and printing. Currently, all product first moves through the weaving department and then through the printing department before it is sold to retail distributors for $2,800 per roll. Dover provides the following information:

1. Dover can start only 20,000 rolls of cloth in the weaving department because of capacity constraints of the weaving machines. Of the 20,000 rolls of cloth started in the weaving department, 1,000 (5%) defective rolls are scrapped at zero net disposal value. The good rolls from the weaving department (called gray cloth) are sent to the printing department. Of the 19,000 good rolls started at the printing operation, 1,900 (10%) defective rolls are scrapped at zero net disposal value. The Dover Corporation’s total monthly sales of printed cloth equal the printing department’s output.
   1. Required
   2. 1. The printing department is considering buying 10,000 additional rolls of gray cloth from an outside supplier at $2,000 per roll, which is much higher than Dover’s cost of weaving the roll. The printing department expects that 10% of the rolls obtained from the outside supplier will result in defective products. Should the printing department buy the gray cloth from the outside supplier? Show your calculations.
   3. 2. Dover’s engineers have developed a method that would lower the printing department’s rate of defective products to 6% at the printing operation. Implementing the new method would cost $1,400,000 per month. Should Dover implement the change? Show your calculations.
   4. 3. The design engineering team has proposed a modification that would lower the weaving department’s rate of defective products to 3%. The modification would cost the company $700,000 per month. Should Dover implement the change? Show your calculations.