Bushworks Ltd convert synthetic slabs into components AX and BX for use in the car industry. Bushworks

Question:

Bushworks Ltd convert synthetic slabs into components AX and BX for use in the car industry. Bushworks Ltd is planning a quality management programme at a cost of £250 000. The following information relates to the costs incurred by Bushworks Ltd both before and after the implementation of the quality management programme:
1 Synthetic slabs
Synthetic slabs cost £40 per hundred. On average 2.5 per cent of synthetic slabs received are returned to the supplier as scrap because of deterioration in stores. The supplier allows a credit of £1 per hundred slabs for such returns. In addition, on receipt in stores, checks to ensure that the slabs received conform to specification costs £14 000 per annum. A move to a just-in-time purchasing system will eliminate the holding of of synthetic slabs. This has been negotiated with the supplier who will deliver slabs of guaranteed design specification for £44 per hundred units, eliminating all stockholding costs.
2 Curing/moulding process
The synthetic slabs are issued to a curing/holding process which has variable conversion costs of £20 per hundred slabs input. This process produces sub-components A and B which have the same cost structure. Losses of 10 per cent of input to the process because of incorrect temperature control during the process are sold as scrap at £5 per hundred units. The quality programme will rectify the temperature control problem thus reducing losses to 1 per cent of input to the process.
3 Finishing process
The finishing process has a bank of machines which perform additional operations on type A and B sub-components as required and converts them into final components AX and BX respectively. The variable conversion costs in the finishing process for AX and BX are £15 and £25 per hundred units respectively. At the end of the finishing process 15 per cent of units are found to be defective.
Defective units are sold for scrap at £10 per hundred units. The quality programme will convert the finishing process into two dedicated cells, one for each of component types AX and BX. The dedicated cell variable costs per hundred sub-components A and B processed will be £12 and £20 respectively. Defective units of components AX and BX are expected to fall to 2.5 per cent of the input to each cell Defective components will be sold as scrap as at present.
4 Finished goods
A finished goods stock of components AX and BX of 15 000 and 30 000 units respectively is held throughout the year in order to allow for customer demand fluctuations and free replacement of units returned by customers due to specification faults. Customer returns are currently 2.5 per cent of components delivered to customers. Variable stock holding costs are £15 per thousand component units. The proposed dedicated cell layout of the finishing process will eliminate the need to hold of finished components, other than sufficient to allow for the free replacement of those found to be defective in customer hands. This stock level will be set at one month's free replacement to customers which is estimated at 500 and 1000 units for types AX and BX respectively. Variable stockholding costs will remain at £15 per thousand component units.
5 Quantitative data
Some preliminary work has already been carried out in calculating the number of units of synthetic slabs, subcomponents A and B and components AX and BX which will be required both before and after the implementation of the quality management programme, making use of the information in the question. Table 1 summarizes the relevant figures.

(a) Evaluate and present a statement showing the net financial benefit or loss per annum of implementing the quality management programme, using the information in the question and the data in Table 1.
(All relevant workings must be shown) (27 marks)

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