AC2720 Wk5 Exercise 1 - Problem 1 Part 1 Costs of quality...

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Unformatted text preview: Problem 1 Part 1: Costs of quality Problem 2 Costs of quality analysis Problem 3 Part 1: Comments on Part 1: Part 2: Comments on Part 2: Part 3: Please provide your answer in the space below Although economically this may seem like a good decision, qualitative factors should be more impor comes to protecting customers from harm and injury. If a product can cause a customer serious har company should take steps to prevent that harm and injury. The company’s code of ethics s Part 4: Please provide your answer in the space below In addition to ethical considerations, the company should consider the societal cost of this decision, problems leaks out at a later date, and governmental intervention and reg Cost of quality analysis, ethical considerations Cost of improving quality of plastic Dollars 2000000 Total cost of lawsuits Dollars 1500000 your answer in the space below this may seem like a good decision, qualitative factors should be more important than quantitative factors when it customers from harm and injury. If a product can cause a customer serious harm and injury, an ethical and moral ould take steps to prevent that harm and injury. The company’s code of ethics should guide this decision. your answer in the space below considerations, the company should consider the societal cost of this decision, reputation effects if word of these problems leaks out at a later date, and governmental intervention and regulation Problem 4 Costs of quality, quality improvements Part 1: Type your answer to part 1 below. Cell Design’s managers plan to increase spending on CAD design improvement improving machine ca managers plan to increase prevention costs to improve quality. This is consistent with much of the res best cost to benefit gains from qu Part 2: Type your answer to part 2 below. Cost of making improvements = $150,000 + $137,500 = $287,500 Benefits of quality improvements: 1. 70% decrease in lost sales from customer returns = 70% × $787,500 = $551,250 Increase in contribution margin = Contribution margin % × Increase in sales = 40% × $551,2 2. 60% decrease in customer replacement costs = 60% × $315,000 = $189,000 Total benefit = $220,500 + $189,000 = $409,500 The benefits of making the quality improvements exceed the costs by $ 122,000 ($409,500 Part 3: The following table shows the actual costs of quality at Cel total costs of quality, and as a percentage of revenues, b production process. Description (1) Prevention costs Appraisal costs Internal failure costs Rework Scrap Total internal failure costs External failure costs Customer replacements Lost contr. margin from customer returns1 Total external failure costs Total costs of quality Amount (2) $210,000 100,000 420,000 21,000 441,000 315,000 315,000 630,000 $1,381,000 The following table shows the actual costs of quality at Cel total costs of quality, and as a percentage of revenues, production process. Description Amount (1) (2) Prevention costs Appraisal costs Internal failure costs Rework Scrap Total internal failure costs External failure costs Customer replacements Lost contr. margin from customer returns1 Total external failure costs Total costs of quality $497,500 100,000 420,000 21,000 441,000 126,000 94,500 220,500 $1,259,000 As a result of implementing the changes in the production process, prevention costs, w 39.5% of the total costs of quality and 4.5% of revenues. External failure costs, which are 45 total costs of quality and 2% of revenues. The changes also result in a decrease in the total (other than the additional sales from fewer returns) will be unaffected by the change in increase in sales, providing further Improvements in the production process could also decrease rework costs resulting in e other advantages such as making employees proud to work provements provement improving machine calibrations to achieve product specifications. These are prevention activities. Cell Design’s is consistent with much of the research on quality. Preventing defects from occurring in the first place generally gives the best cost to benefit gains from quality improvement 500 787,500 = $551,250 crease in sales = 40% × $551,250 = $220,500 ,000 = $189,000 costs by $ 122,000 ($409,500 – $287,500), so Cell Design should implement the changes to improve quality. e actual costs of quality at Cell Design, as a percentage of as a percentage of revenues, before the change in the production process. Percentage of Percentage of Total Revenues Costs of Quality (3) = (2) ÷ TQC (4) = (2) ÷ Revenue 15.21% 2.00% 7.24% 0.95% 31.93% 4.20% 45.62% 6.00% 100.00% 13.15% e actual costs of quality at Cell Design, as a percentage of as a percentage of revenues, after the change in the production process. Percentage of Percentage of Total Revenues Costs of Quality (3) = (2) ÷ TQC (4) = (2) ÷ Revenue 39.52% 7.94% 4.50% 0.90% 35.03% 3.99% 17.51% 2.00% 100.00% 11.39% n process, prevention costs, which are 15.2% of the total costs of quality and 2% of revenues, will become rnal failure costs, which are 45.6% of the total costs of quality and 6% of revenues, will become 17.5% of the esult in a decrease in the total costs of quality. The preceding calculations assume that overall sales revenues be unaffected by the change in the production process. But quality improvements could well result in an ase in sales, providing further benefit to Cell Design. ase rework costs resulting in even more benefits from quality improvement. Better quality could also have ng employees proud to work for Cell Design and increasing employee morale. ...
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