BA381Problem Set 3 CHAPTER 2: 2-1, Part A Expedition Outfitters produces expensi
ID: 349983 • Letter: B
Question
BA381Problem Set 3 CHAPTER 2: 2-1, Part A Expedition Outfitters produces expensive water repellent, down-lined parkas. The company implemented a total quality-management program in 2009. Following are quality-related accounting data that have been accumulated for the five-year period after the program's start. Quality Costs (000s) Internal failure External failure Prevention 2012 S52.8 105.8 10.1 31.3 2013 38.7 96.4 28.1 29.5 2014 $37.2 94.5 39.1 23.4 2015 S30.3 70.1 49.0 19.7 S47.0 115.9 isal 29.7 2013 2014 S392.1 2737.4 2015 S401.2 2801.3 Accounting Measures (000s) 2011 2012 Manufacturing cost S373.4 2534.5 $374.2 2422.6 2599.0 a. Compute the company's total failure costs as a percentage of total quality costs for each of the five ycars. Does there appear to be a trend to this result? If so, speculate on what might have caused the trend. b. Compute prevention costs as a percentage of total quality costs and appraisal costs as a percentage of total quality costs for cach of the five years. Speculate on what the company's quality strategy appears to be. c. Compute quality-sales indices and quality-cost indices for cach of the five years. Is it possible to assess the effectiveness of the company's quality-management program from these index values? What is your evaluation? Part B: Expedition Outfitters produces approximately 19,000 parkas annually. The quality management program has shown results, improving the average percentage of good parkas produced by 2.5% each year beginning with 79% good-quality parkas in 2011 . Of the poor-quality parkas that are produced about 20% can be reworked and sold as good. d. Compute the following for cach of the 5 years: the number parkas that are of salcable quality after the first run, the number parkas that are rejected after the first run, the number of reworked parkas, and the total number of saleable parkas (the product yield). e. Using a rework cost of $15.50 per parka, determine the costs to rework parkas, the total manufacturing cost and the manufacturing cost per saleable parka for cach of the five years. What do these results imply about the company's quality management program? Hint: You know the cost to produce a oodfirst-run parka. yow ere recovering second-run parkay, then honw muck does it cost to recover them? How many do you reoer? How do yow incorporate rhose mumbers into the overall cost of prodwcing good parkas?) You are on the right track if. for 2011: Total Failure Casts as a %of Total Quality Casts-83.196, Prevention Casts as a % of Total Quality Casts-1.8%. Appraisal Casts s %of Total Ouality Costs-15.2%, Ouality Sales Index-7.7%, (uality Cast Index-52.5%, and Manufacturing Cost per Saleable Parka-24.40 (results may vary slighty from roundingExplanation / Answer
Total quality costs = Internal failure costs + External failure costs + Prevention + Appraisal
Total Quality costs of 2011 = 47 + 115.9 + 3.5 + 29.7 = 196.1
Total Quality costs of 2012 = 52.8 + 105.8 + 10.1 + 31.3 = 200
Total Quality costs of 2013 = 38.7+ 96.4 + 28.1 + 29.5 = 192.7
Total Quality costs of 2014 = 37.2 + 94.5 + 39.1 + 23.4 = 194.2
Total Quality costs of 2015 = 30.3 + 70.1 + 49 + 19.7 = 169.1
Ans a) Total failure costs = Internal failure cost + External failure cost
Total failure cost of 2011 = 162.9
Failure costs as % of total cost = (162.9/196.1)*100 = 83.06%
Total failure cost of 2012 = 158.6
Failure costs as % of total cost = (158.6/200)*100 = 79.3%
Total failure cost of 2013 = 135.1
Failure costs as % of total cost = (135.1/192.7)*100 = 70.10%
Total failure cost of 2014 = 131.7
Failure costs as % of total cost = (131.7/194.2)*100 = 67.81%
Total failure cost of 2015 = 100.4
Failure costs as % of total cost = (100.4/169.1)*100 = 59.37%
The values of the percentage of failure costs out of the total quality costs are decreasing. This shows that the company is investing in the prevention costs so that the defects are minimized and thus the failures reduce.
Ans b) Prevention costs as a % of total quality costs of 2011 = (3.5/196.1)*100 = 1.784%
Prevention costs as a % of total quality costs of 2012 = (10.1/200)*100 = 5.05%
Prevention costs as a % of total quality costs of 2013 = (28.1/192.7)*100 = 14.58%
Prevention costs as a % of total quality costs of 2014 = (39.1/194.2)*100 = 20.13%
Prevention costs as a % of total quality costs of 2015 = (49/169.1)*100 = 28.97%
Appraisal costs as a % of total quality costs of 2011 = (29.7/196.1)*100 = 15.14%
Appraisal costs as a % of total quality costs of 2012 = (31.3/200)*100 = 15.65%
Appraisal costs as a % of total quality costs of 2013 = (29.5/192.7)*100 = 15.30%
Appraisal costs as a % of total quality costs of 2014 = (23.4/194.2)*100 = 12.04%
Appraisal costs as a % of total quality costs of 2015 = (19.7/169.1)*100 = 11.64%
From this information we can see that the investment in prevention of defects of the products is increasing annually and the appraisal costs as a % of total costs are decreasing annually. This shows that the company wants to reduce the defects in the production system so that in the long run it works much more efficiently and increases profits.
Ans c) Quality sales index = (Total quality costs / Total sales ) * 100
For 2011 = (196.1/2534.5)* 100 = 7.73 %
Similarly,
For 2012 = 8.25%
For 2013 = 7.41%
For 2014 = 7.094%
For 2015 = 6.03%
Quality cost index = (Total quality costs / Total manufacturing cost ) * 100
For 2011 = (196.1/373.4)* 100 = 52.517 %
Similarly,
For 2012 = 53.44%
For 2013 = 50.43%
For 2014 = 49.52%
For 2015 = 42.14%
From the above indices we can see that both the quality sales index and the quality cost index increase once then decrease continuously. From this we can infer that the total profits of the company are increasing per unit amount spent on quality improvement and that the total costs on quality improvement as a percentage of total overall costs are decreasing.
Ans d) Annual parkas produced = 19000
% of good parkas in 2011 = 79
% of good parkas in 2012 = 81.5
% of good parkas in 2013 = 84
% of good parkas in 2014 = 86.5
% of good parkas in 2015 = 89
Number of good parkas after first run
- In 2011 = 79% of 19000 = 15010
- In 2012 = 81.5% of 19000 = 15485
- In 2013 = 84% of 19000 = 15960
- In 2014 = 86.5% of 19000 = 16435
- In 2015 = 89% of 19000 = 16910
Number of rejected parkas after first run
- In 2011 = 19000 - 15010 = 3990
- In 2012 = 19000 - 15485 = 3515
- In 2013 = 19000 - 15960 = 3040
- In 2014 = 19000 - 16435 = 2565
- In 2015 = 19000 = 16910 = 2090
Number of reworked parkas
In 2011 = 20% of 3990 = 798
- In 2012 = 20% of 3515 = 703
- In 2013 = 20% of 3040 = 608
- In 2014 = 20% of 2565 = 513
- In 2015 = 20% of 2090 = 418
Total number of saleable parkas = Good quality parkas from the first run + reworked parkas
In 2011 = 15010 + 798 = 15808
- In 2012 = 15485 + 703 = 16188
- In 2013 = 15960 + 608 = 16568
- In 2014 = 16435 + 513 = 16948
- In 2015 = 16910 + 418 =17328
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