Question

Backwoods American, Inc., produces expensive water-repellent, down-lined parkas. The co. implemented a TQM program in 2005. Following are the quality-related accounting data that have been accumulated for the 5-year period after the program's start.

			Year
	2006	2007	2008	2009	2010
Quality Costs ($1000s)
Prevention	3.2	10.7	28.3	42.6	50
Appraisal	26.3	29.2	30.6	24.1	19.6
Internal Failure	39.1	51.3	48.4	35.9	32.1
External Failure	118.6	110.5	105.2	91.3	65.2
Accounting Measures ($1000s)
Sales	2700.6	2690.1	2705.2	2310.2	2880.7
Manufacturing Cost	420.9	423.4	424.7	436.1	435.5

• Compute the co's total failure costs ratios (=(Internal Failure + External Failure)/(TQC) x 100%) as a % of TQC for each of the 5 years. Does there appear to be a trend? What might be the cause?
• Compute prevention costs (prevention/TQC x 100%) and appraisal cost (appriasal/TQC x 100%), each as a % of TC, during each of the 5 years. What do you guess is the co's quality strategy (e.g., emphasis on being proactive or reactive)?
• Compute quality-sales indices (TQC/Sales) and quality-cost indices (TQC/MfrCost) for each of the 5 years. Can one assess the effectiveness of the co's quality management program from these indices (i.e., are these indices good indicators of effectiveness)?
• List some examples of each quality-related costs - i.e., of prevention, appraisal, and internal and external failure costs - that might result from the production of the parkas.
• The BA Inc produces 20,000 parkas annually. The quality management program implemented improved average percentage of good parkas produced by 2% each year beginning with 83% good quality parkas in 2005. Only 20% of poor quality parkas can be reworked (and made good). Compute the product yield for each of the 5 years.
• Assuming a rework cost of $12/parka, determine the manufacturing cost per good parka for each of the 5 years. What do these results imply about the co's quality management program?

Answer 1

(a) Total Quality cost is sum of prevention, appraisal, internal failure and external failure

Total Failure cost ratio =

	Year
	2006	2007	2008	2009	2010
Quality Costs ($1000s)
Prevention	3.2	10.7	28.3	42.6	50
Appraisal	26.3	29.2	30.6	24.1	19.6
Internal Failure	39.1	51.3	48.4	35.9	32.1
External Failure	118.6	110.5	105.2	91.3	65.2
TQC	187.2	201.7	212.5	193.9	166.9
Accounting Measures ($1000s)
Sales	2700.62	2690.12	705.22	310.22	880.7
Manufacturing Cost	420.9	423.4	424.7	436.1	435.5
Total Failure Cost Ratio	84.24%	80.22%	72.28%	65.60%	58.30%

Total Failure cost ratio is decreasing continiously from year 2006 to 2010. This is due to decrease in external failure cost significantly over the years.

(b)

Prevention Cost Ratio = Prevention Cost / TQC

Appraisal Cost Ratio = Appraisal Cost / TQC

	Year
	2006	2007	2008	2009	2010
Prevention Cost Ratio	1.71%	5.30%	13.32%	21.97%	29.96%
Appraisal Cost Ratio	14.05%	14.48%	14.40%	12.43%	11.74%

These ratios are indicating proactive approach as more money is spended on prevention cost over the years from 2006 to 2010.

(c) Quality sales Indices = TQC / Sales

Quality cost Indices = TQC / Manufacturing Cost

	Year
	2006	2007	2008	2009	2010
Quality Sales Indices	0.069	0.075	0.301	0.625	0.190
Quality Cost Indices	0.445	0.476	0.500	0.445	0.383