At the beginning of Year 1, Kare Company initiated a quality improvement program. Considerable effort was expended over two years to reduce the number of defective units produced. By the end of the second year, reports from the production manager revealed that scrap and rework had both decreased. The president of the company was pleased to hear of the success but wanted some assessment of the financial impact of the improvements. To make this assessment, the following financial data were collected for the two years.
| Year 1 | Year 2 |
Sales | $10,000,000 | $10,000,0 |
Scrap | 400,000 | 300,000 |
Rework | 600,000 | 400,000 |
Product inspection | 100,000 | 125,000 |
Product warranty | 800.000 | 600,000 |
Quality training | 40,000 | 80,000 |
Materials inspection | 60,000 | 40,000 |
Instructions
a. Classify the costs as prevention, appraisal, and internal and external failure.
b. Compute total quality cost as a percentage of sales for each of the two years. By how much has profit increased because of quality improvements between Year 1 and Year 2?
c. Graph the prevention and appraisal costs versus the internal and external failure costs for Year 1 and Year 2.
d. Several individuals are critical of the cost-benefit quality model. Identify and explain at least two criticisms. Identify measures, other than cost numbers, that companies can use to track quality.
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