| Book Edition | 4th Edition |
| Author(s) | Hansen, Mowen |
| ISBN | 9781305970663 |
| Publisher | Cengage |
| Subject | Management |
Quality Cost Classification, Quality Improvement, and Profitability
At the beginning of the year, Kare Company initiated a quality improvement program. Considerable effort was expended to reduce the number of defective units produced. By the end of the 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 current and preceding years:
Required:
Classify the costs as prevention, appraisal, internal failure, or external failure.
Quality Cost Classification, Quality Improvement, and Profitability
At the beginning of the year, Kare Company initiated a quality improvement program. Considerable effort was expended to reduce the number of defective units produced. By the end of the 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 current and preceding years:
Required:
Compute quality cost as a percentage of sales for each of the two years. By how much has profit increased because of quality improvements? Assuming that quality costs can be reduced to 2.5 percent of sales, how much additional profit is available through quality improvements (assume that sales revenues will remain the same)?
Internal failure costs: Scrap and rework
External failure costs: Warranty
Prevention costs: Quality training
Appraisal costs: Product inspection and materials inspection
