Tutorial Questions-Solved

16.1 The benefits from improving quality always exceed the costs.’ Do you agree? Explain.
16.15 ‘When evaluating a company’s performance on the time dimension, managers should
consider only financial measures.’ Do you agree with this statement? Explain your answer.
No. Managers should use both financial and nonfinancial measures to manage the performance
of their firms along the time dimension. Financial measures, such as revenue and cost
measures, evaluate the financial effects of increases or decreases in measures such as
customer-response times. Nonfinancial measures help managers evaluate how well they have
done on goals such as improving manufacturing cycle times and customer-response times that
drive financial performance. Nonfinancial measures are leading indicators of financial
performance.
16.16 ✶✶ Analysis of costs of quality

Openair Ltd makes chairs for outside living spaces. The company has been working on improving quality
over the past year and wants to evaluate how well it has done on costs-of-quality (COQ) measures. Below
are costs of quality, and revenues, relating to the past two years:
2017 2018
Supplier evaluation $5 000 $5 500
Scrap $7 500 $5 900
Warranty repair costs $9 980 $7 960
Design engineering $4 475 $6 775
Inspection $3 500 $4 600
Rework $8 980 $5 800
Total revenue $500 000 $575 000
Required
1. Identify the cost-of-quality (COQ) category (prevention, appraisal, internal failure and external failure)
for each of these costs.
2. Prepare a COQ report by calculating and presenting the costs of quality for each category and the ratio
of each COQ category to revenues and total quality costs.
3. Present a brief report that evaluates how well the company has done based on its COQ measures.
3. The COQ report indicates the following:
 Total COQ in Total Revenue decreased from 7.9% to 6.3%. In dollars, the decrease was
$2900.
 Total Prevention Costs and appraisal costs increased slightly while Internal Failure Costs in
Total Revenue decreased from 3.3% to 2% and External Failure Costs in Total Revenue
decrease from 2% to 1.4%
 As a percentage of Total COQ, Total Prevention Costs have increased by 9.6% (33.6% -
24%) and Product testing costs (appraisal costs) have increased by 3.7% (12.6% - 8.9%).
 Quality costs have shifted to the area of prevention where problems are solved before
production starts. The slight increase in these costs as a percentage of Total Revenue have
paid off in terms of reducing Internal and External Failure Costs.
In summary, Openair ltd’s quality program appears to have been successful.
16.20✶✶ Quality performance, non-financial measures of quality and time

Wandering Mobile Phones Ltd (WMPL) has developed a mobile phone that can be used anywhere in the
world; even in countries like Japan that have a relatively unique mobile phone system. WMPL has been
receiving complaints about the phone. For the past two years, WMPL has been test-marketing the phones
and gathering non-financial information related to actual and perceived aspects of the phone’s quality. It
expects that given the lack of competition in this market, increasing the quality of the phone will result
in higher sales and thereby higher profits.
Quality data for 2017 and 2018 include the following (in thousands of phones):
2017 2018
Mobile phones produced and shipped 2500 10 000
Number of defective units shipped 125 400
Number of customer complaints 190 250
Units reworked before shipping 150 700
Production cycle time 13 days 14 days
Average customer-response time 28 days 26 days
Required
1. For each of 2017 and 2018, calculate:
a. percentage of defective units shipped
b. customer complaints as a percentage of units shipped
c. percentage of units reworked during production
d. production cycle time as a percentage of total time from order to delivery.
2. Referring to the information calculated in requirement 1, explain whether RMPL’s quality and
timeliness
have improved.
3. Explain how to calculate manufacturing cycle time and customer-response time, and why
manufacturing cycle time has increased while customer-response time has decreased.
2. Quality has, by and large, improved. The percentage of defects has
decreased by 1% point and the number of customer complaints has decreased by
5%. The former indicates an improvement in the quality of the mobile phones
being produced. The latter has positive implications for future sales. However, the
percentage of units reworked on has also increased. WMPL should look into the
reasons behind this increase. One possible explanation is the more than fivefold
increase in production that may have resulted in a higher percentage of errors.
WMPL should do a root-cause analysis to identify reasons for the additional
rework. Finally, the average time from order placement to order delivery has
decreased in number of days. Therefore, customers are receiving their orders on
a timelier basis. However, production or manufacturing cycle time is a higher
fraction of customer response time. WMPL should seek ways to reduce
production cycle time. For example, process improvements could reduce both
rework and manufacturing cycle time. Any reduction in production cycle time
would help to reduce customer response time even further.
3. Manufacturing cycle time = wait time + manufacturing time.

Producing 10,000 cell phones in 2018 may have required more waiting time for
each order than the waiting time from producing 2500 cell phones in 2017.
Production cycle time may have increased as more time was spent on making
products with fewer defects and reducing rework activities.
Customer response time = receipt time + manufacturing cycle time + delivery time
Manufacturing cycle time is a subset of customer response time. Lower customer

response time is due to order processing efficiency and/or delivery efficiency, and
not manufacturing cycle time.
16.28 ✶✶ Quality performance

Sydney Ltd sells 250 000 V148 valves to the car and truck industry. Sydney Ltd has a capacity of 150 000
machine-hours and can produce two valves per machine-hour. V148’s contribution margin per unit is $7.
Sydney Ltd sells only 250 000 valves because 50 000 valves (20% of the good valves) need to be
reworked.
It takes 1 machine-hour to rework two valves, so 25 000 hours of capacity are used in the rework process.
Sydney Ltd’s rework costs are $550 000. Rework costs consist of:
■ direct materials and direct rework labour (variable costs)—$5 per unit
■ fixed costs of equipment, rent and overhead allocation—$6 per unit.
Sydney Ltd’s process designers have developed a modification that would maintain the speed of the
process and ensure 100% quality and no rework. The new process would cost $538 000 per year. The
following additional information is available:
■ The demand for Sydney Ltd’s V148 valves is 400 000 per year.
■ Truton Ltd has asked Sydney Ltd to supply 27 000 T752 valves (another product) if Sydney Ltd
implements the new design. The contribution margin per T752 valve is $12. Sydney Ltd can make one
T752 valve per machine-hour with 100% quality and no rework.
Required
1. Suppose that Sydney Ltd’s designers implement the new design. Should Sydney Ltd accept Truton
Ltd’s
order for 27 000 T752 valves? Show your calculations.
2. Should Sydney Ltd implement the new design? Show your calculations.
3. What non-financial and qualitative factors should Sydney Ltd consider in deciding whether to
implement the new design?
3. Sydney Corporation should also consider other benefits of improving
quality. For example, the process of quality improvement will help Sydney's
managers and workers gain expertise about the product and the manufacturing
process that may lead to further cost reductions in the future. Improving quality
within the plant is also likely to translate into delivering better quality products to
customers. The increased reputation and customer goodwill may well lead to
higher future revenues through greater unit sales and higher sales prices.

Tutorial Questions-Solved

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tutorial Questions-Solved

Uploaded by

Copyright:

Available Formats

16.1 The benefits from improving quality always exceed the costs.’ Do you agree? Explain.

16.16 ✶✶ Analysis of costs of quality

In summary, Openair ltd’s quality program appears to have been successful.

16.20✶✶ Quality performance, non-financial measures of quality and time

3. Manufacturing cycle time = wait time + manufacturing time.

Manufacturing cycle time is a subset of customer response time. Lower customer

16.28 ✶✶ Quality performance

You might also like