Question

Kathy Shorts, president of Oliver Company, was concerned with the trend in sales and profitability. The company had been losing customers at an alarming rate. Furthermore, the company was barely breaking even. Investigation revealed that poor quality was at the root of the problem. At the end of 20x5, Kathy decided to begin a quality improvement program. As a first step, she identified the following costs in the accounting records as quality related 20x5 Sales (589,000 units@$100) Retesting Rework Vendor certification Consumer complaints Warranty Test labor Inspection labor Design reviews $58,900,000 1,649,200 2,532,700 647,900 1,236,900 2,238,200 1,649,200 1,472,500 117,800 Required 1. Prepare a quality cost report by quality cost category. Round percentages to one decimal place i rounding is required. For example, S 6 ould be entered as'5 Oliver Company Quality Cost Report For the Year Ended December 31, 20x5 Quality Costs Total Quality Cost Percentage of Sales Prevention costs: Vendor certification Design reviews Appraisal costs Test labor Inspection labor Internal failure costs Retesting Rework Consumer complaints WarrantyY External failure costs Total quality costs 2. Calculate the relative distribution percentages for each quality cost category. Round percentages to one decimal place if rounding is required. For example, 5.789% would be entered as "5.8". Prevention Appraisal Internal failure External failure Comment on the distribution. More resources need to be invested in control activities with the objective of driving down failure costs. 3. Using the Taguchi loss function, an average loss per unit is computed to be $15 per unit. What are the hidden costs of external failure? How does this affect the relative distribution? A serious imbalance between control and failure costs has now been revealed, and failure costs should be decreased. 4. Shorts's quality manager decided not to bother with the hidden costs since any efforts to reduce measured external failure costs will also reduce the hidden costs. Do you agree or disagree? Agree, though ignoring the hidden costs may result in underestimating the need to reduce failure costs.

Answer 1

Oliver Company
Quality cost report
For the year ended December, 31 2015
	Quality cost	Total Quality cost	Percentage of sales
Prevention cost
Vendor certification	$647,900
Design review	$117,800	$765,700	$1.30	($ 765700/58900000*100)
Appraisal cost
Test Labor	$1,649,200
Inspection Labor	$1,472,500	$3,121,700	$5.30	($ 3121700/58900000*100)
Internal Failure cost
Retesting	1649200
Rework	2532700	4181900	$7.10	($ 4181900/58900000*100)
External Faliure cost
Consumer Complaints.	1236900
Warranty	2238200	3475100	$5.90	($3475100/58900000*100)
Total Quality Cost		$11,544,400