Lakay Company had sales of $40 million in 1994. In 2001, sales had increased to $50 million. A quality-improvement program was implemented in 1994. Overall conformance quality was targeted for improvement. The quality costs for 1994 and 2001 follow. Assume any changes in quality costs are attributable to improvements in quality.

1994 2001 Internal failure costs $ 3,000,000 $ 150,000 External failure costs 4,000,000 100,000 Appraisal costs 1,800,000 375,000 Prevention costs 1,200,000 625,000 Total quality costs $10,000,000 $1,250,000 Required:

1. Compute the quality costs/sales ratio for each year. Is this type of improvement possible?

2. Calculate the relative distribution of quality costs by category for 1994 (quality costs by category/total quality costs). What do you think of the relative cost distribution? How do you think quality costs 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? Do you think further reductions are possible?

4. Suppose that the CEO of Lakay received a bonus equal to 10 percent of the quality cost savings each year. Do you think gainsharing is a good or bad idea? What risks are there, if any, to gainsharing? nj5