ide Gear Limited, based in Ontario, manufactures after-market accessories for mo
ID: 2578762 • Letter: I
Question
ide Gear Limited, based in Ontario, manufactures after-market accessories for motorcycles, such as fairings, hand guards, seats, and cargo carriers. In its early years of operation, Ride Gear had a reputation for outstanding product quality, which is a key determinant of success in this industry. Competition has become extremely intense in recent years, and Ride Gear has lost market share to companies based in China. In a recent survey of product quality conducted by a leading motorcycle magazine, Ride Gear slipped to fifth place among the top 10 accessory manufacturers. In response to the disappointing results from the market survey, the president of Ride Gear, Dave Rankin, decided to take action in an effort to improve product quality. One of his first steps was to set up a quality improvement team to identify key areas where changes were most needed. Rankin remembered from his managerial accounting course in university that high quality of conformance is the overall objective and that different types of quality costs can interact to improve quality. However, beyond these basic details, Rankin’s recollection of quality costs was limited, so he appointed Gale Smith to lead the quality improvement team and make the changes needed to allow Ride Gear to better compete. Smith’s quality improvement program has now been in operation for two years. The company’s most recent quality cost report is shown below:
3 Ride Gear Limited, based in Ontario, manufactures after-market accessories for motorcycles, such as fairings, hand guards, seats, and cargo carriers. In its early years of operation, Ride Gear had a reputation for outstanding product quality, which is a key determinant of success in this industry. Competition has become extremely intense in recent years, and Ride Gear has lost market share to companies based in China. In a recent survey of product quality conducted by a leading motorcycle magazine, Ride Gear slipped to fifth place among the top 10 accessory manufacturers rvey, the president of Ride Gear, Dave In response to the disappointing results from the market su Rankin, decided to take action in an effort to improve product quality. One of his first steps was to set up a quality improvement team to identify key areas where changes were most needed. Rankin remembered from his managerial accounting course in university that high quality of conformance is the overall objective and that different types of quality costs can interact to improve quality. However, beyond these basic details, Rankin's recollection of quality costs was limited, so he appointed Gale Smith to lead the quality improvement team and make the changes needed to allow Ride Gear to better compete Smith's quality improvement program has now been in operation for two years. The company's most recent quality cost report is shown below RIDE GEAR LIMITED Quality Cost Report (in thousands) Year 1 Year Prevention costs Systems development Quality training Quality improvement projects S 125 S 170 90 280 10 60 Total prevention cost 195 Appraisal costs ting and inspection of raw materials Final product testing and inspection 90 90 45 50 Total appraisal cost 180 95 Internal failure costs Scrap, rework labour, and overhead 150 70 Re-inspection of reworked products Total internal failure cost External failure costs 200 115 Warranty repairs 150 70 Product returns and allowances Total external failure cost Total quality cost Total production cost 95 140 S 775 S630 S3,000 $3,300 200Explanation / Answer
YEAR 1 YEAR 2 Amount Percentage on Amount Percentage on 1) Total production cost Total quality cost Total production cost Total quality cost Prevention costs: % % % % Systems development 125 4.2% 16.1% 170 5.2% 27.0% Quality training 10 0.3% 1.3% 20 0.6% 3.2% Quality projects 60 2.0% 7.7% 90 2.7% 14.3% Total prevention costs 195 6.5% 25.2% 280 8.5% 44.4% Appraisal costs: Testing and inspection 90 3.0% 11.6% 45 1.4% 7.1% Final product testing 90 3.0% 11.6% 50 1.5% 7.9% Total appraisal cost 180 6.0% 23.2% 95 2.9% 15.1% Internal failure costs: Scrap, rework labor and overhead 150 5.0% 19.4% 70 2.1% 11.1% Re-inspection 50 1.7% 6.5% 45 1.4% 7.1% Total internal failure cost 200 6.7% 25.8% 115 3.5% 18.3% External failure costs: Warranty repairs 150 5.0% 19.4% 45 1.4% 7.1% Product returns 50 1.7% 6.5% 95 2.9% 15.1% Total external failure cost 200 6.7% 25.8% 140 4.2% 22.2% Total quality cost 775 25.8% 100.0% 630 19.1% 100.0% Total production cost 3000 3300 Note: There is a mistake in the question. For Year 2, External failure cost is given as 70 for Warranty and 95 for Product returns and allowances, with the total shown as 140, where as the correct total would be 165. However, in the table for solution, the break up figures are given as 45 and 95, which agrees with the total of 140. This has been taken for the solution. 2) YES. The total quality cost has decreased from 25.8% of total production cost in Year 1, to 19.1% in year 2. By spending more on 'Prevention costs' in the second year, the firm has been able to reduce the costs on appraisal, internal failure and external failure.
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