Question

Trade-Offs Among Quality Cost Categories, Total Quality Control, Gainsharing

Javier Company has sales of $9,700,000 and quality costs of $1,610,000. 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 $340,000, and the failure costs drop to $1,050,000. 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	$156,000	$1,454,000
Quality training	340,000	1,050,000
Process control	535,000	709,000
Product inspection	583,000	676,000
Supplier evaluation	716,000	206,000
Prototype testing	970,000	137,000
Engineering redesign	991,000	55,000

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.

	Control Costs	Failure Costs
Current quality costs	156000	1454000
Quality Training	340000	1050000
Process Control	535000	709000
Supplier evaluation	668000	239000
Engineering redesign	689000	157000

Total Quality Costs = Control Costs 689000 & Failure Costs 157000

Two activities are not selected:

* Product inspection - Control costs increase by 48000 but failure costs decrease only by 33000.

* Prototype Testing - Control costs increase by 254000 but failure costs decrease only by 69000.

Their costs are more than the benefit received by them in return.

2.

a. Reduction in Total Quality Costs = (156000+1454000) - (689000+157000)

= 764000 (Control costs increased by 533000 and failure costs decreased by 1297000)

b.

Control costs % = [689000/(689000+157000)]*100 = 81%

Failure Costs % = [157000/(689000+157000)]*100 = 19%

3.

Bonus Pool = 10%*Reduction in quality costs

= 10%*764000

= $76400