AMA Sdn Bhd (AMA) provides packed meals delivered to the doorstep in the neighbourhood of Jalil City. The company offers its products in a package which includes main course, dessert and a drink. The company uses a few digital platforms to take orders and has been doing well with a good customer base. Since January 2020, AMA has experienced an exponential growth in business when the city was under a movement control to curb the covid pandemic situation. The company has been striving to cope with the market demand and the rather short cycle time to deliver packed meals once orders have been received from customers. BUSI3162-E1 5 BUSI3162-E1 One of the key initiatives made by the company is to mechanise some of its processes by introducing numerous automated kitchen equipment to replace labour work. To maintain quality of the products, standard operating procedures (SOPs) have been developed and implemented as a matter of policy. Some workers have since been transferred to the inspection stations to check on the quality of the meals before they leave the company's kitchen. During the recent management meeting, there was some discussions about one of the company's product, “Lady@Lunch". Lady@Lunch is targeted at working women who now needs to work from home and struggling to cook over the short lunch break. A recent review of the market responses suggests that the product is not achieving the sales revenue as expected. The Marketing Director is of the view that the product is priced too high compared to some of the players in the market. The Kitchen Director however, feels that the price is deemed appropriate to recover the kitchen overhead costs which include costs of testing some special ingredients, rejects and reworks due to the stringent product specifications. As the Management Accountant, you have initiated a working group comprising teams in the cross functional areas tasked to gather insights about the market needs and preferences for the product, and to review the company's current position in responding to the market. The following information has been gathered for Lady@Lunch: Demand in the market is rather uncertain, with a probability of having 500,000 meals per month (15% probability), 520,000 meals (30%), 540,000 (45%) or 580,000 (10%). • Average market price of products similar to Lady@Lunch is £15 per meal. Pricing adjustment: customers are willing to pay a premium of 10% above the current price if AMA upgrades its food packaging to avoid leakage of gravy or other forms of liquid food. The management is keen to fulfil this requirement. • Predicted actual cost: £13.80 per meal. AMA has set financial performance objective for its operations and requires all its products to achieve a net profit margin of at least 20%. You have also called upon your team to work with the kitchen team to gather more details to better understand the kitchen overhead costs related to Lady@Lunch. The following information has been revealed for May 2021: • Cost of raw materials: £1,680,000 Staff costs: Preparation £620,000; Cooking £580,000 and Packing £70,000 Training of kitchen staff: Training cost £120,000 Costs of food inspections at the finishing point: £110,000 Machining costs: £385,600 • Rework items that did not pass the inspections: £105,000 • Discounts given: £150,500 of discounts were given following customer complaints that the food items received did not follow the remarks they made for the orders (e.g., avoid chilli, extra cheese, etc.) Cost of testing special ingredients: £50,500 Rejects at kitchen: Cost value £420,000, sold at scrap value of £120,000 Settlement cost: £92,000 was paid to settle a customer complaint related to a food item found with broken seal upon arrival at the customer's site . 

REQUIRED: 

a) (i) The management of AMA generally takes a risk-neutral approach in dealing with uncertainties in business. Based on the information gathered, calculate for Lady @Lunch the cost gap per meal and the total size of the gap to be addressed. 

(ii) Critically discuss the usefulness and practical implications of implementing target costing in AMA.

 (b) (1) Prepare a Cost of Quality Report in a format useful to the management.

 (ii) Critically evaluate the usefulness of Cost of Quality model, making specific reference to the results presented in the report.