3. You are the operations manager for a small kayak and canoe manufacturer (Vall

Question

3. You are the operations manager for a small kayak and canoe manufacturer (Valley Kayaks) located on the Pacific Northwest (Oregon). Lately your company has experienced product quality problems. Simply put, the kayaks that you produce occasionally have defects and require rework. Consequently, you have decided to assess the impact of introducing a total quality management (TQM) program. After discussing the potential effects with representatives from marketing, finance, accounting, and quality, you arrive at a set of estimates (contained in the following table) Top management has told you that it wil accept any proposal that you come up with, provided that it page 48 improves the return on assets measure by at least 15 percent. Would you go forward with this proposal to improve quality? Category Sales Cost of goods sold Variable expenses Fixed expenses Inventory Accounts receivable Other current assets Fixed assets Current Values $2,000,000 $1,500,000 S 300,000 S 100,000 S 300,000 S 100,000 S 500,000 S 400,000 Estimated Impact of TQWM 5% + (improvement) 8.25%-(reduction) 25%

Explanation / Answer

Let us first reproduce the table given above adding to the right hand side increased or decreased figures on account of TQM and also calculating Net Profit , Total Assets & Return on Asset:

Now from the above table and calculations for Return Assets for current values and changed values on account of TQM we can see that Return on Assets has improved by 18.35-7.69=10.66 % which is less than the target of 15% so we will not go forward with this proposal to improve quality.

Category Current Values(USD) Estimated Impact of TQM % Estimated Impact of TQM (USD) Increased or decreased Value on account of TQM(USD) A B C D=B*C/100 E=B+D Sales F 2000000 5 100000 2100000 Cost of Goods sold G 1500000 0 0 1500000 Variable Expenses H 300000 -8.25 -24750 275250 Fixed Expenses I 100000 0 0 100000 Net Profit J=F-G-H-I 100000 224750 Inventory K 300000 -25 -75000 225000 Accounts Receivable L 100000 0 0 100000 Other Current Assets M 500000 0 0 500000 Fixed Assets N 400000 0 0 400000 Total Assets O=K+L+M+N 1300000 1225000 Return on Assets % = Net Profit *100 /Total Assets P=J*100/O 7.69 18.35

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