Question

Three Rivers Inc. provides cable TV and Internet service to the local community. The activities and activity costs of Three Rivers are identified as follows:

1	Activities	Activity Cost
2	Billing error correction	$33,000.00
3	Cable signal testing	105,000.00
4	Reinstalling service (installed incorrectly the first time)	29,000.00
5	Repairing satellite equipment	35,000.00
6	Repairing underground cable connections to the customer	15,000.00
7	Replacing old technology cable with higher quality cable	164,000.00
8	Replacing old technology signal switches with higher quality switches	125,000.00
9	Responding to customer home repair requests	49,000.00
10	Training employees	145,000.00
11	Total	$700,000.00

	Required:
a.	Identify the cost of quality classification for each activity and whether the activity is value-added or non-value-added.
b.	Prepare a cost of quality report. Assume that sales are $1,900,000. Round percentages to one decimal place.*
c.	Prepare a value-added/non-value-added analysis.*
d.	Interpret the information in (b) and (c). *Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.

Answer 1

1	Activities	Activity Cost
2	Billing error correction - External failure (non value added)	$33,000.00
3	Cable signal testing - Appraisal (non value added)	105,000.00
4	Reinstalling service - Internal (non value added)	29,000.00
5	Repairing satellite equipment - Internal (non value added)	35,000.00
6	Repairing underground cable connections to the customer - Internal (non value added)	15,000.00
7	Replacing old technology cable with higher quality cable - Appraisal (value added)	164,000.00
8	Replacing old technology signal switches with higher quality switches -Appraisal (value added)	125,000.00
9	Responding to customer home repair requests -Internal (non value added)	49,000.00
10	Training employees - Prevention (non value added)	145,000.00
11	Total	$700,000.00

B)

cost classification	cost of quality	% of quality cost	% of total sales
prevention	145000	20.71%	145000/1900000= 7.63%
appraisal	394000	56.28%	20.73%
internal	128000	18.28%	6.73%
external	33000	4.72%	1.73%
total	700000	100%

C )

Category	Amount	percent
value added	289000	41.28%
non value added	411000	58.72%
	700000

D) Non value added constructs a major part of total quality cost. Firm is incurring appraisal cost as main quality cost .