KKR Enterprise is a major NZ motorbike manufacturer. Over the last decade, motorbike manufacturers from the subcontinent have been able to price their motorbikes below those of the KKR Enterprise, but the company has retained its market share due to the poor quality of the imported motorbikes. Recently, however, the quality of the imported bikes has improved, and KKR Enterprise has had to cut prices to maintain market share. The managing director, Rachel Dakin, is concerned about the viability of the business at these lower prices and asks the head of the accounting team, Natalie Heymar, to investigate the problem.

Over the next six months Natalie identifies the following costs, which she thinks may be related to quality (she's not sure though):

• Cost of repairs under warranty, $9,375.
• Cost of replacement bikes provided under warranty, $19,500.
• Cost of rewelding faulty joints discovered during processing, $59,750.
• Engineering costs to correct production line quality problems, $42,500.
• General engineering costs, $97,500.
• Bike showroom running expenses, $41,250.
• Inspection of bikes put into finished goods warehouse, $45,000.
• Laboratory testing of bikes and components, $27,500.
• Lost contribution on machine downtime during correction of production line quality problems, $56,250.
• Operating an Xray machine to detect faulty welds, $41,250.
• Quality inspection in the goods receiving area, $38,750.
• Quality inspections during processing, $26,250.
• Sales commissions on faulty bikes returned by customers, $5,000.
• Sales commissions paid to sacked employees, $16,250.
• Contribution margin forgone on bikes returned by customers, $5,625.
• Contribution margin forgone on lost future bike sales, $19,750.
• Cost of bikes returned by customers and scrapped $16,250.
• Rework on defective wheels, $21,250.
• Cost of faulty bikes that are scrapped after finished goods inspection, $27,500.
• Cost of faulty components that are scrapped, $9,250.
• Cost of quality training programs, $11,000.

During this period, total manufacturing costs were $3,122,000.

QUESTIONS

1. do a cost of quality report, showing each category of quality costs that provides information to the management in an informative way.
2. Comment on the relative proportions of each of the four categories of quality costs. Your answer should include your analysis as well as your evaluation of the current situation.