Eastern Switching Co. (ESC) produces telecommunications equipment. Charles Laurant, ESC's president, believes that product quality is the key to gaining competitive advantage. Laurant implemented a total quality management (TQM) program with an emphasis on customer satisfaction. The following information is available for the first year (2007) of the TQM program compared with the previous year.

If you want to use Excel to solve this exercise, go to the Excel Lab at www.prenhall.com/horngren/cost12e and download the template for Exercise 19-19.
1. For each of the years 2006 and 2007, calculate:
a. Percentage of defective units shipped
b. On-time delivery rate
c. Customer complaints as a percentage of units shipped
d. Percentage of units reworked during production
2. On the basis of your calculations in requirement 1, has ESC's performance on quality and timeliness improved? Explain briefly.
3. Philip Larkin, a member of ESC's board of directors, comments that regardless of the effect that the program has had on quality, the output per labor-hour has declined between 2006 and 2007. Larkin believes that lower output per labor hour will lead to an increase in costs and lower operating income.
a. How did Larkin conclude that output per labor-hour declined in 2007 relative to 2006?
b. Why might output per labor-hour decline in 2007?
c. Do you think that a lower output per labor-hour will decrease operating income in 2007? Explain briefly?

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2006 2 Total number of units produced and sold 3 Units delivered before or on scheduled delivery date 4 Number of defective units shipped 10,000 8,500 400 5 Number of customer complaints other than for defective units 500 2007 11,000 9,900 330 511 Average time from when customer places order for a unit to 6 when unit is delivered to customer 7 Number of units reworked during production 8 Manufacturing lead time 9 Direct and indirect manufacturing labor-hours 30 days 600 20 days 25 days 627 16 days 90,000 110,000