D mie Question Two: Managing Quality YPop Ltd makes musical jewellery boxes. DJ, the general manager, recently attended a conference on quality and productivity, where she learned that many firms had introduced quality improvement programmes, resulting in significantly increased profitability. Some firms had reduced quality costs from 25% of sales to 2% of sales. DJ was enthused by the potential for improved quality performance (If this works, I could get a whopper bonus this year!" she thought). DJ contacted his management accountant (Angela), and requested an estimate of the total quality costs being incurred by YPop, as well as a breakdown of those costs into four categories: Prevention; Appraisal; Internal failure; and External failure. Angela gathered the following information from 2020: i. Sales revenue is $30,000,000 and net profit is $5,000,000 ii. 6,000 boxes were returned by customers for repair. Repair costs are $40 per box. iii. Seven inspectors (who only do final inspections) each receive a salary of $50,000. iv. 30,000 boxes are rejected on final inspection each year (on average), because they did not meet quality standards. Of these, 80% can be reworked at a cost of $40 per unit. The remaining 20% have to be scrapped, costing $150 per box on average. v. Due to poor product performance, a customer cancelled an order that would have increased profits by $300,000. YPop's marketing department agreed that other customers have felt the same, and that roughly this amount is lost every year for similar reasons. vi. Six employees are employed in the complaint department, on salaries of $45,000 each. vii. YPop gave sales allowances of $250,000 due to faulty products being sent to customers. viii. All new employees at YPop have to participate in a three-hour quality training programme. The estimated annual cost of the program is $180,000. ix. Inspection of the final product also requires testing equipment, which costs $240,000 every year to operate and maintain. 2 IX. Inspection or me year to operate and maintain. o requires testing equipment, wmich costs 240,000 every Required: a) Prepare a cost of quality report. Discuss the quality costs/sales ratio. b) Discuss the distribution of quality costs among the four categories and the non- conformance to conformance ratio. i) Do you think the distribution and ratio is ideal? ii) If not, where would you like to see changes to the distribution and why? c) DJ held a meeting with Angela to discuss the cost of quality report and commented: "The COQ report is a terrible report on our quality performance. About half of our costs relate to scrap and rework. I believe the root cause of these costs is the amount of inspection we do. Eliminating inspection will reduce total quality costs by 50%. Inspection after all is a non-value adding activity and should be eliminated anyway." Do you agree with DJ's comments? Explain you answer. d) Regardless of DJ's comments, based on your answers to (a) and (b), provide at least three suggestions that could improve YPop's overall quality and reduce total quality costs. e) For each of the following, provide one external direct measure of quality and one internal direct measure of quality, and explain why you have chosen this measure. i) A drug sold by a pharmaceutical company which is taken for serious illness. ii) Work performed by the customer complaints department at YPop Remember that a good measure is one that among other things): Is specific and allows comparison; and Is time bound