a In 20X1, KOIN Company initiated a full-scale, quality improvement program. At the end of the year, Jan Tipp, the president, noted with some satisfaction that the defects per unit of the product had dropped significantly compared to the prior year. He was also pleased that relationships with suppliers had improved and defective materials had declined. The new quality training program was also well- accepted by employees. However, of most interests to the president was the impact of the quality improvements on profitability. To help assess the dollar impact of the quality improvements, the actual sales and the actual quality costs for 20X0 and 20X1 are as follows by quality category: Sales Product quality test Warranty Recall allowances Retesting Initial design reviews Rework Production yield losses Packaging inspection Quality improvement projects Returned materials Scrap Quality circles training 20X0 $8,000,000 40.000 400.000 120,000 200.000 2.000 360.000 160,000 320,000 2,000 160,000 280.000 4,000 20X1 $10,000,000 28.000 440,000 140,000 160,000 20,000 320,000 100,000 300.000 100,000 160,000 240,000 40,000 All prevention costs are fixed (by discretion). Assume all other quality costs are unit-level variables. Required: 1. Compute the relative distribution of quality costs for each year. Do you believe that the company is moving in the right direction in terms of the balance among the quality cost categories? Explain. (10%) 3. Estimate the additional improvement in 20X1's profits if KOIN Company ultimately reduces its quality costs to 2.5 percent of sales revenues. What are the strategies that KOIN could implement to achieve the target improvement? (5%) a In 20X1, KOIN Company initiated a full-scale, quality improvement program. At the end of the year, Jan Tipp, the president, noted with some satisfaction that the defects per unit of the product had dropped significantly compared to the prior year. He was also pleased that relationships with suppliers had improved and defective materials had declined. The new quality training program was also well- accepted by employees. However, of most interests to the president was the impact of the quality improvements on profitability. To help assess the dollar impact of the quality improvements, the actual sales and the actual quality costs for 20X0 and 20X1 are as follows by quality category: Sales Product quality test Warranty Recall allowances Retesting Initial design reviews Rework Production yield losses Packaging inspection Quality improvement projects Returned materials Scrap Quality circles training 20X0 $8,000,000 40.000 400.000 120,000 200.000 2.000 360.000 160,000 320,000 2,000 160,000 280.000 4,000 20X1 $10,000,000 28.000 440,000 140,000 160,000 20,000 320,000 100,000 300.000 100,000 160,000 240,000 40,000 All prevention costs are fixed (by discretion). Assume all other quality costs are unit-level variables. Required: 1. Compute the relative distribution of quality costs for each year. Do you believe that the company is moving in the right direction in terms of the balance among the quality cost categories? Explain. (10%) 3. Estimate the additional improvement in 20X1's profits if KOIN Company ultimately reduces its quality costs to 2.5 percent of sales revenues. What are the strategies that KOIN could implement to achieve the target improvement? (5%)
