Question

Trade-Offs Among Quality Cost Categories, Total Quality Control, Gainsharing Javier Company has sales of $9,800,000 and quality costs of $1,611,000. The company is embarking on a major quality improvement program. During the next three years, Javier intends to attack failure costs by increasing its appraisal and prevention costs. The "right" prevention activities will be selected, and appraisal costs will be reduced according to the results achieved. For the coming year, management is considering six specific activities: quality training, process control, product inspection, supplier evaluation, prototype testing, and redesign of two major products. To encourage managers to focus on reducing non-value-added quality costs and select the right activities, a bonus pool is established relating to reduction of quality costs. The bonus pool is equal to 10 percent of the total reduction in quality costs. Current quality costs and the costs of these six activities are given in the following table. Each activity is added sequentially so that its effect on the cost categories can be assessed. For example, after quality training is added, the control costs increase to $314,000, and the failure costs drop to $1,041,000. Even though the activities are presented sequentially, they are totally independent of each other. Thus, only beneficial activities need be selected. Control Costs Failure Costs Current quality costs $159,000 $1,452,000 Quality training 314,000 1,041,000 Process control 536,000 717,000 Product inspection 618,000 675,000 Supplier evaluation 736,000 195,000 Prototype testing 944,000 112,000 Engineering redesign 999,000 59,000 Required: 1. Identify the control activities that should be implemented. - Select your answer -Quality training, process control, product inspection, and engineering redesignQuality training, process control, and engineering redesignProcess control, product inspection, and prototype testingQuality training, process control, supplier evaluation, and engineering redesignProcess control, supplier evaluation, and engineering redesignQuality training, product inspection, and prototype testingQuality training, process control, and prototype testingItem 1 Calculate the total quality costs associated with this selection. Assume that an activity is selected only if it increases the bonus pool. $ 2. Given the activities selected in Requirement 1, calculate the following: a. The reduction in total quality costs. $ b. The percentage distribution for control and failure costs. Round your answers to the nearest whole percentage value (for example, 16% would be entered as "16"). Control costs % Failure costs % c. The amount for this year's bonus pool. $

Answer 1

1) We select the below activities to be implemented (Working note 1)

Process	Process Control Cost
Supplier evaluation	1,18,000
Quality Training	1,55,000
Process Control	2,22,000
Total	4,95,000

2 a) Reduction in total cost

Process	Net Cost Saving
Supplier evaluation	3,62,000
Quality Training	2,56,000
Process Control	1,02,000
Total	7,20,000

2 b) percentage distribution for control and failure costs (working note 2)

Before quality improvement program
	Amt	% Distribution
Control Cost	1,59,000.00	10%
Current Failure Cost	14,52,000.00	90%
	16,11,000.00	100%
After quality improvement program
	Amt	% Distribution
Control Cost	6,54,000.00	73%
Current Failure Cost	2,37,000.00	27%
	8,91,000.00	100%

c Bonus Pool ( Working Note 3)

$ 72,000

Working Notes

1 )Calculation of Saving Per Process

	Control Costs	Failure Costs	Total		Process Cost	Savings	Net savings (Savings - Process Cost)
					A	B	(B-A)
Current quality cost	1,59,000.00	14,52,000.00	16,11,000.00
Quality training	3,14,000.00	10,41,000.00	13,55,000.00		1,55,000.00 (314000-159000)	4,11,000.00 (1041000-1452000)	2,56,000.00
Process control	5,36,000.00	7,17,000.00	12,53,000.00		2,22,000.00 (536000-314000)	3,24,000.00 (1041000-717000)	1,02,000.00
Product inspection	6,18,000.00	6,75,000.00	12,93,000.00		82,000.00 (618000-536000)	42,000.00 (717000-675000)	(40,000.00)
Supplier evaluation	7,36,000.00	1,95,000.00	9,31,000.00		1,18,000.00 (736000-618000)	4,80,000.00 (675000-195000)	3,62,000.00
Prototype testing	9,44,000.00	1,12,000.00	10,56,000.00		2,08,000.00 (944000-736000)	83,000.00 (195000-112000)	(1,25,000.00)
Engineering redesign	9,99,000.00	59,000.00	10,58,000.00		55,000.00 (999000-944000)	53,000.00 (112000-59000)	(2,000.00)

We select activity which results in net cost saving

2) Calculation of Total Cost after implementation of program

	Amount $
Current Control Cost	1,59,000.00
Add : Supplier evaluation Cost	1,18,000.00
Add : Quality training Cost	1,55,000.00
Add : Process control Cost	2,22,000.00
Total Control Cost (A)	6,54,000.00
Current Failure Cost	14,52,000.00
Less :Saving in cost due to
Supplier evaluation	4,80,000.00
Quality training	4,11,000.00
Process control	3,24,000.00
Total Failure Cost (B)	2,37,000.00
Total quality Cost (A+B)	8,91,000.00

3) Calculation of Bonus Pool

Total Cost Saving

Process	Net Cost Saving
Supplier evaluation	3,62,000
Quality Training	2,56,000
Process Control	1,02,000
Total	7,20,000
Bonus Pool (10 % Of Cost Saving) (10 % of 7,20,000)	72,000