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products division produces paper diapers napkins and paper towels 649565

DISTRIBUTION OF QUALITY COSTS

Paper Products Division produces paper diapers, napkins, and paper towels. The divisional manager has decided that quality costs can be minimized by distributing quality costs evenly among the four quality categories and reducing them to no more than 5 percent of sales. He has just received the following quality cost report:

Paper Products Division

Quality Cost Report

For the Year Ended December 31, 2007

 

 

 

 

 

 

 

 

 

 

Prevention costs:

 

 

 

 

Quality training

$ 3,000

$ 2,500

$ 2,000

$ 7,500

Quality engineering

3,500

1,000

2,500

7,000

Quality audits

500

1,000

1,500

Quality reporting

2,500

2,000

1,000

5,500

Total prevention costs

$ 9,000

$ 6,000

$ 6,500

$ 21,500

Appraisal costs:

 

 

 

 

Inspection, materials

$ 2,000

$ 3,000

$ 3,000

$ 8,000

Process acceptance

4,000

2,800

1,200

8,000

Product acceptance

2,000

1,200

2,300

5,500

Total appraisal costs

$ 8,000

$ 7,000

$ 6,500

$ 21,500

Internal failure costs:

 

 

 

 

Scrap

$10,000

$ 3,000

$ 2,500

$ 15,500

Disposal costs

7,000

2,000

1,500

10,500

Downtime

1,000

1,500

2,500

5,000

Total internal failure costs

$18,000

$ 6,500

$ 6,500

$ 31,000

External failure costs:

 

 

 

 

Allowances

$10,000

$ 3,000

$ 2,750

$ 15,750

Customer complaints

4,000

1,500

3,750

9,250

Product liability

1,000

1,000

Total external failure costs

$15,000

$ 4,500

$ 6,500

$ 26,000

Total quality costs

$50,000

$24,000

$26,000

$100,000

Assume that all prevention costs are fixed and that the remaining quality costs are variable (unit-level).

Required:

1. Assume that the sales revenue for the year totaled $2 million, with sales for each product as follows: diapers, $1 million; napkins, $600,000; paper towels, $400,000. Evaluate the distribution of costs for the division as a whole and for each product line. What recommendations do you have for the divisional manager?

2. Now, assume that total sales are $1 million and have this breakdown: diapers, $500,000; napkins, $300,000; paper towels, $200,000. Evaluate the distribution of costs for the division as a whole and for each product line in this case. Do you think it is possible to reduce the quality costs to 5 percent of sales for each product line and for the division as a whole and, simultaneously, achieve an equal distribution

of the quality costs? What recommendations do you have?

3. Assume total sales of $1 million with this breakdown: diapers, $500,000; napkins, $180,000; paper towels, $320,000. Evaluate the distribution of quality costs. What recommendations do you have for the divisional manager?

4. Discuss the value of having quality costs reported by segment.

 

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