Morrison Company had sales of $20,000,000 in 1994. In 2001, sales had increased to $25,000,000.

A quality improvement program was implemented at the beginning of 1994. Overall confor¬

mance quality was targeted for improvement. The quality costs for 1994 and 2001 are shown below. Assume any changes in quality costs are attributable to improvements in quality

Required:
1. Compute the quality cost-to-sales ratio for each year. Is this type of improvement possible?
2. Calculate the relative distribution of costs by category for 1994. What do you think of the way costs are distributed? (A pie chart may be of some help.) How do you think they will be distributed as the company approaches a zero-defects state?

3. Calculate the relative distribution of costs by category for 2001. What do you think of the level and distribution of quality costs? (A pie chart may be of some help.) Do you think further reductions are possible?
4. The quality manager for Morrison indicated that the external failure costs reported are only the measured costs. He argued that the 2001 external costs were much higher than those reported and that additional investment ought to be made in control costs. Dis¬
cuss the validity of his viewpoint.
5. Suppose that the manager of Morrison received a bonus equal to 10% of the quality cost savings each year. Do you think that gainsharing is a good or a bad idea? Discuss the risks of gainsharing.

Transcribed Image Text:

1994 2001 Internal failure costs External failure costs Appraisal costs Prevention costs $1,500,000 $ 75,000 2,000,000 50,000 900,000 187,500 600,000 312,500 Total quality costs $5,000,000 $625,000