Wayne Johnson, president of Banshee Company, recently returned from a conference on quality and productivity. At the conference, he was told that many American firms have quality costs totalling 20 to 30 percent of sales. He, however, was sceptical about this statistic. But even if the quality gurus were right, he was sure that his company’s quality costs were much lower—probably less than 5 percent. On the other hand, if he was wrong, he would be passing up an opportunity to improve profits significantly and simultaneously strengthen his competitive position. The possibility was at least worth exploring. He knew that his company produced most of the information needed for quality cost reporting—but there never was a need to bother with any formal quality data gathering and analysis. This conference, however, had convinced him that a firm’s profitability can increase significantly by improving quality—provided the potential for improvement exists. Thus, before committing the company to a quality improvement program, Wayne requested a preliminary estimate of the total quality costs currently being incurred. He also indicated that the costs should be classified into four categories: prevention, appraisal, internal failure, and external failure. He has asked you to prepare a summary of quality costs and to compare the total costs to sales and profits. To assist you in this task, the following information has been prepared from the past year, 2016: (i) Sales revenue, $15,000,000; net income, $1,500,000. (ii) During the year, customers returned 90,000 units needing repair. Repair cost averages $1 per unit. (iii) Four inspectors are employed, each earning an annual salary of $60,000. These four inspectors are involved only with final inspection (product acceptance). (iv) Total scrap is 150,000 units. Of this total, 60 percent is quality related. The cost of scrap is about $5 per unit. (v) Each year, approximately 450,000 units are rejected in final inspection. Of these units, 80 percent can be recovered through rework. The cost of rework is $0.75 per unit. (vi) A customer cancelled an order that would have increased profits by $150,000. The customer’s reason for cancellation was poor product performance. (vii) The company employs three full-time employees in its complaint department. Each earns $40,500 a year. (viii) The company gave sales allowances totalling $45,000 due to substandard products being sent to the customer. 2 | P a g e (ix) The company requires all new employees to take its three-hour quality training program. The estimated annual cost of the program is $30,000.

Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
icon
Related questions
Question

Wayne Johnson, president of Banshee Company, recently returned from a conference on quality and productivity. At the conference, he was told that many American firms have quality costs totalling 20 to 30 percent of sales. He, however, was sceptical about this statistic. But even if the quality gurus were right, he was sure that his company’s quality costs were much lower—probably less than 5 percent. On the other hand, if he was wrong, he would be passing up an opportunity to improve profits significantly and simultaneously strengthen his competitive position. The possibility was at least worth exploring. He knew that his company produced most of the information needed for quality cost reporting—but there never was a need to bother with any formal quality data gathering and analysis. This conference, however, had convinced him that a firm’s profitability can increase significantly by improving quality—provided the potential for improvement exists. Thus, before committing the company to a quality improvement program, Wayne requested a preliminary estimate of the total quality costs currently being incurred. He also indicated that the costs should be classified into four categories: prevention, appraisal, internal failure, and external failure. He has asked you to prepare a summary of quality costs and to compare the total costs to sales and profits. To assist you in this task, the following information has been prepared from the past year, 2016:
(i) Sales revenue, $15,000,000; net income, $1,500,000.
(ii) During the year, customers returned 90,000 units needing repair. Repair cost averages $1 per unit.
(iii) Four inspectors are employed, each earning an annual salary of $60,000. These four inspectors are involved only with final inspection (product acceptance).
(iv) Total scrap is 150,000 units. Of this total, 60 percent is quality related. The cost of scrap is about $5 per unit.
(v) Each year, approximately 450,000 units are rejected in final inspection. Of these units, 80 percent can be recovered through rework. The cost of rework is $0.75 per unit.
(vi) A customer cancelled an order that would have increased profits by $150,000. The customer’s reason for cancellation was poor product performance.
(vii) The company employs three full-time employees in its complaint department. Each earns $40,500 a year.
(viii) The company gave sales allowances totalling $45,000 due to substandard products being sent to the customer.
2 | P a g e
(ix) The company requires all new employees to take its three-hour quality training program. The
estimated annual cost of the program is $30,000.

Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 5 steps with 5 images

Blurred answer
Knowledge Booster
Introduction to Quality management
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, operations-management and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Practical Management Science
Practical Management Science
Operations Management
ISBN:
9781337406659
Author:
WINSTON, Wayne L.
Publisher:
Cengage,
Operations Management
Operations Management
Operations Management
ISBN:
9781259667473
Author:
William J Stevenson
Publisher:
McGraw-Hill Education
Operations and Supply Chain Management (Mcgraw-hi…
Operations and Supply Chain Management (Mcgraw-hi…
Operations Management
ISBN:
9781259666100
Author:
F. Robert Jacobs, Richard B Chase
Publisher:
McGraw-Hill Education
Business in Action
Business in Action
Operations Management
ISBN:
9780135198100
Author:
BOVEE
Publisher:
PEARSON CO
Purchasing and Supply Chain Management
Purchasing and Supply Chain Management
Operations Management
ISBN:
9781285869681
Author:
Robert M. Monczka, Robert B. Handfield, Larry C. Giunipero, James L. Patterson
Publisher:
Cengage Learning
Production and Operations Analysis, Seventh Editi…
Production and Operations Analysis, Seventh Editi…
Operations Management
ISBN:
9781478623069
Author:
Steven Nahmias, Tava Lennon Olsen
Publisher:
Waveland Press, Inc.