5. Reliant Ltd produces the "Rockblaster", an industrial drill used in construction and mining. Safety is an important aspect of the product. Complaints from customers and returns for repair are at a higher level than the company expected and the company's reputation is suffering. As part of the investigation into this, the company wishes to compile a cost of quality report as a starting point for improving the quality of its product and its reputation. The following information has been compiled for the three months ended 31st March 2020. Costs incurred Incoming material inspection Inspection of units during production 20% inspected Inspection of units on completion 100% inspected Customer service department cost Reviews of reliability of Material suppliers Cost of rework in factory per unit Cost of a warranty repair per unit returned Factory Equipment Breakdown cost of repairs Production units lost through breakdown of equipment 40,000 10 per unit 20 per unit 500,000 500,000 40 500 200,000 1,500 Information on sales, production and returns Sales price per unit Variable costs per unit 5,000 2,000 Units Produced Units scrapped in factory Units reworked in factory Units returned under warranty : replaced 2,500 units Repaired 3,000 units 50,000 2% 4% Estimated lost sales through decline in reputation 2,000 units The company does not hold finished goods inventory Required: a) Using the information given above prepare a cost of quality statement divided into appropriate categories. Also show the total of each category as a percentage of turnover. Briefly comment on the information revealed by the statement. (8 marks) b) The production director has been keeping some statistics of reasons for scrapping some units and common complaints where drills are returned. In light of this information the following actions are being considered: Question continues on next page 5 b) (continued) For each of the actions provide appropriate calculations to indicate the relevant financial costs and benefits as far as possible from the information available. (You should use the results for January to March 2020 to estimate the changes in activity through improvements). i) One of the internal faults requiring units to be reworked is poor design of the casing relative to the shape of the bought in engine. It has been decided to work with the engine supplier and the casing designers to rectify this. It will involve; 100,000 500,000 Casing Design engineers' work Recalibration of production line Additional inspection of each unit of the supplied engine when delivered from the manufacturer Regular inspection and testing of the production process 10 per inspection Annual cost 600,000 These actions could be implemented within 3 months and should result in savings each three months of reducing internal scrapped units to zero and internal reworks to 2% ii) Another main issue identified with units returned after sale is the linkage of the drill bit to the engine which for some uses is not strong enough. It is suggested that this should be resolved by producing a "Rockblaster Plus" with more robust linkage, and a recommendation of the type of work for which a Rockblaster Plus" should be used. There should be a clear indication that Drills which have not been used for the correct purpose will not be mended under warranty. The cost of adopting this proposal will be: 200,000 Design engineers work Introducing a separate manufacturing section for part of the Rockblaster Plus production Initial training of employees in new production 100,000,000 500,000 These actions could be implemented within 6 months and are expected to result each quarter in 5,000 sales of "Rockblaster Plus priced at 6,000 instead of the "Rockblaster". The "Rockblaster Plus" would have variable costs of 2,200. The proposal would: reduce sales units returned under warranty and replaced by 70%, reduce sales returned under warranty and repaired by 50% reduce the sales lost by poor reputation to 500 units. iii) It has also been decided to introduce a regular routine maintenance schedu costing 800,000 quarterly which should avoid breakdowns entirely. (6 marks) c) Draw up a Report for the Board of Directors commenting on each proposal. You should indicate which should be adopted first and any concerns you have about the estimated figures. (6 Marks) 5. Reliant Ltd produces the "Rockblaster", an industrial drill used in construction and mining. Safety is an important aspect of the product. Complaints from customers and returns for repair are at a higher level than the company expected and the company's reputation is suffering. As part of the investigation into this, the company wishes to compile a cost of quality report as a starting point for improving the quality of its product and its reputation. The following information has been compiled for the three months ended 31st March 2020. Costs incurred Incoming material inspection Inspection of units during production 20% inspected Inspection of units on completion 100% inspected Customer service department cost Reviews of reliability of Material suppliers Cost of rework in factory per unit Cost of a warranty repair per unit returned Factory Equipment Breakdown cost of repairs Production units lost through breakdown of equipment 40,000 10 per unit 20 per unit 500,000 500,000 40 500 200,000 1,500 Information on sales, production and returns Sales price per unit Variable costs per unit 5,000 2,000 Units Produced Units scrapped in factory Units reworked in factory Units returned under warranty : replaced 2,500 units Repaired 3,000 units 50,000 2% 4% Estimated lost sales through decline in reputation 2,000 units The company does not hold finished goods inventory Required: a) Using the information given above prepare a cost of quality statement divided into appropriate categories. Also show the total of each category as a percentage of turnover. Briefly comment on the information revealed by the statement. (8 marks) b) The production director has been keeping some statistics of reasons for scrapping some units and common complaints where drills are returned. In light of this information the following actions are being considered: Question continues on next page 5 b) (continued) For each of the actions provide appropriate calculations to indicate the relevant financial costs and benefits as far as possible from the information available. (You should use the results for January to March 2020 to estimate the changes in activity through improvements). i) One of the internal faults requiring units to be reworked is poor design of the casing relative to the shape of the bought in engine. It has been decided to work with the engine supplier and the casing designers to rectify this. It will involve; 100,000 500,000 Casing Design engineers' work Recalibration of production line Additional inspection of each unit of the supplied engine when delivered from the manufacturer Regular inspection and testing of the production process 10 per inspection Annual cost 600,000 These actions could be implemented within 3 months and should result in savings each three months of reducing internal scrapped units to zero and internal reworks to 2% ii) Another main issue identified with units returned after sale is the linkage of the drill bit to the engine which for some uses is not strong enough. It is suggested that this should be resolved by producing a "Rockblaster Plus" with more robust linkage, and a recommendation of the type of work for which a Rockblaster Plus" should be used. There should be a clear indication that Drills which have not been used for the correct purpose will not be mended under warranty. The cost of adopting this proposal will be: 200,000 Design engineers work Introducing a separate manufacturing section for part of the Rockblaster Plus production Initial training of employees in new production 100,000,000 500,000 These actions could be implemented within 6 months and are expected to result each quarter in 5,000 sales of "Rockblaster Plus priced at 6,000 instead of the "Rockblaster". The "Rockblaster Plus" would have variable costs of 2,200. The proposal would: reduce sales units returned under warranty and replaced by 70%, reduce sales returned under warranty and repaired by 50% reduce the sales lost by poor reputation to 500 units. iii) It has also been decided to introduce a regular routine maintenance schedu costing 800,000 quarterly which should avoid breakdowns entirely. (6 marks) c) Draw up a Report for the Board of Directors commenting on each proposal. You should indicate which should be adopted first and any concerns you have about the estimated figures. (6 Marks)