【正文】 $ 405,000 ................. Quality training 135,000 $ 540,000 % Appraisal costs: ........Materials inspection $ 54,000 ....... Process acceptance 67,500 ......... Product inspection 40,500 162,000 Internal failure costs: .................... Reinspection $ 67,500 .................................. Scrap 47,250 114,750 External failure costs: ................................Recalls $ 135,000 .......................... Lost sales 270,000 ...............Returned goods 128,250 533,250 Total quality costs ................. $ 1,350,000 % 319 14–3 Concluded 2. R el ativ e D is t ribu t ion of Qual ity Co sts020406080100Q u alit y C o st sPercentage of Total Quality CostsPrev en t io n A p p raisal In t ernal F ailu re Ext ernal F ailu re Re la tiv e Di s tribution of Q ua li ty Cos ts12%8%40% 40% Pre v e n tio nA p p ra is a lIn te rna l F a il u reEx te rna l F a il u re Failure costs are almost 50% of the total costs. This indicates that there is still ample opportunity for improving quality by investing more in prevention and appraisal activities. 320 14–4 1. Quality costs: Year 1: $2,100,000 ( ? $10,000,000) Year 2: $1,980,000 ( ? $11,000,000) Year 3: $1,540,000 ( ? $11,000,000) Year 4: $1,200,000 ( ? $12,000,000) Net ine increase: Year 1: ( – )$11,000,000 = $330,000 Year 2: ( – )$11,000,000 = $440,000 Year 3: ( – )$12,000,000 = $480,000 2. Profit potential: ( – )$12,000,000 = $900,000 The % goal is the level many quality experts identify as the one that panies should strive to obtain. Pavon Company’s experience shows that it is an achievable goal. Also, although most Japanese panies do not track quality costs, some have measured their costs of quality, and they generally tend to be less than 5% (pared with the . experience that has produced values between 20 and 30%). 3. Year 3—No Change Year 3—Change Sales....................................... $ 11,000,000 $ 11,000,000 Variable expenses .............. 7,236,842a 6,345,263b .... Contribution margin $ 3,763,158 $ 4,654,737 a$125 ? $11,000,000/$190. bQuality costs per unit: Year 1: ? $200 = $ Year 3: ? $190 = $ Decrease in perunit variable quality cost = $ – $ = $ Decrease in perunit total variable cost = $ – $ = $ Variable costs (total, Year 3) = $ ? $11,000,000/$190 = $6,345,263 Increase in profitability: $4,654,737 – $3,763,158 = $891,579 321 14–5 1. 2020: $7,500,000/$30,000,000 = 2020: $937,500/$37,500,000 = The quality costtosales ratio improved from 25% to %. 2. Internal failure: $2,250,000/$7,500,000 = 30% External failure: $3,000,000/$7,500,000 = 40% Appraisal: $1,350,000/$7,500,000 = 18% Prevention: $900,000/$7,500,000 = 12% The pie chart for 2020 is as follows: Qu a lity C o s ts30%40%18%12%I n t e r n a l F a i l u r eAp p r a i s a lE x t e r n a l F a i l u r eP r e v e n t i o n The percentage of quality costs spent on internal and external failures is too high. If costs are reduced to %, then the pany is approaching the goal of zero defects. As zero defects is approached, failure costs will approach zero, leaving the bulk of quality costs in the prevention and appraisal categories. Of these two categories, the prevention category would dominate. 322 14–5 Continued 3. Internal failure: $112,500/$937,500 = 12% External failure: $75,000/$937,500 = 8% Appraisal: $281,250/$937,500 = 30% Prevention: $468,750/$937,500 = 50% The pie chart for 2020 is as follows: Qual it y Cost s12%8%30%50%I n te r n a l F a i l u r ePr e v e n ti o nA p p r a i s a lE x te r n a l F a i l u r e Quality costs are better distributed than in 2020. Control costs account for 80% of the total quality costs (versus only 30% in 2020). Failure costs have shrunk from 70% of the total in 2020 to only 20% in 2020. Moreover, total quality costs have shrunk from 25% of sales to % of sales. Costs in every category have been reduced. From an activitybased management perspective, further reductions are possible—at least in the failure categories. These are nonvalueadded costs and, in theory, can and should be reduced to zero. 4. Some external failure costs are not measured and reported in the accounting records. If the multiplier effect were four (for example), then in 2020, the external failure costs would be $225,000 ([4 ? $75,000] – $75,000) higher than reported. Given the reality of hidden costs, there is some validity to his point of view and it may be wise to invest additional funds for control activities. 323 14–5 Concluded 5. Gainsharing provides a strong incentive for managers to improve quality and reduce quality costs. Gainsharing is a good idea, provided the incentive system is carefully designed. The bonus must be truly based on quality improvements. Quality gains, stemming from quality cost reductions, must flow from true quality improvements. Thus, there should be operational quality measures that provide evidence of actual quality improvements. One possibility is to base bonuses only on reductions in failure and appraisal categories. This provides an incentive for managers to invest in preventive activities—actions that should reduce ―poor‖ quality costs. 14–6 1. Only four of the activities should be implemented: quality training, process control, supplier evaluation, and engineering redesign. Each of these four activities reduces failure costs more than it costs to implement the activity (thus, increasing the bonus pool). The cost reduction for failures is less than the amount spent for product inspection and p