Information from a quality report for 2012 prepared by Lindsey
Williams, assistant controller of Citocell, a manufacturer of electric motors, is as follows:
Revenue.......... $10,000,000
Inspection of production... $ 90,000
Warranty liability..... $ 260,000
Product testing....... $ 210,000
Scrap.......... $ 230,000
Design engineering..... $ 200,000
Percentage of customer complaints.. 5%
On-time delivery rate....... 93%
Davey Evans, the plant manager of Citocell, is eligible for a bonus if the total costs of quality as a percentage of revenue are less than 10%, the percentage of customer complaints is less than 4%, and the on-time delivery rate exceeds 92%. Evans is unhappy about the customer complaints of 5% because, when preparing her report, Williams actually surveyed customers regarding customer satisfaction. Evans expected Williams to be less proactive and to wait for customers to complain. Evans’s concern with Williams’s approach is that it introduces subjectivity into the results and also fails to capture the seriousness of customers’ concerns. “When you wait for a customer to complain, you know he is complaining because it is something important. When you do customer surveys, customers mention whatever is on their mind, even if it is not terribly important.”
John Roche, the controller, asks Williams to see him. He tells her about Evans’s concerns. “I think Davey has a point. See what you can do.” Williams is confident that the customer complaints are genuine and that customers are concerned about quality and service. She believes it is important for Citocell to be proactive and obtain systematic and timely customer feedback, and then to use this information to make improvements. She is also well aware that Citocell has not done customer surveys in the past, and that, except for her surveys, Evans would probably be eligible for the bonus. She is confused about how to handle Roche’s request.
REQUIRED
1. Calculate the ratio of each cost-of-quality category (prevention, appraisal, internal failure, and external failure) to revenue in 2012. Are the total costs of quality as a percentage of revenue less than 10%?
2. Would it be unethical for Williams to modify her analysis? What steps should Williams take to resolve this situation?