LY Ltd makes foldable grocery bags (encrusted with jewellery) for fashion-conscious environmentalists. Mandy, 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.

Mandy was enthused by the potential for improved quality performance (If this works, I could get a whopper bonus this year! she thought). Mandy contacted her management accountant (Angela), and requested an estimate of the total quality costs being incurred by LY, as well as a breakdown of those costs into four categories: Prevention; Appraisal; Internal failure; and External failure. Angela gathered the following information from 2017:

i. Sales revenue is $20,000,000 and net profit is $4,000,000 ii. 6,000 bags were returned by customers for repair. Repair costs are $70 per bag. iii. Ten inspectors (who only do final inspections) each receive a salary of $30,000. iv. 30,000 bags are rejected on final inspection each year (on average), due to quality issues. Of these, 80% can be reworked at a cost of $30 per unit. The remaining 20% have to be scrapped, costing $150 per bag on average. v. A customer cancelled an order that would have increased profits by $500,000. The reason given was poor product performance. The marketing department of LY agreed that other customers have felt the same, and that roughly this amount is lost every year for similar reasons. vi. Eight full-time employees are employed in the complaint department, on salaries of $35,000 each. vii. LY gave sales allowances totalling $250,000 due to substandard products being sent to customers. viii. All new employees at LY have to participate in a three-hour quality training programme. The estimated annual cost of the program is $160,000. ix. Inspection of the final product also requires testing equipment, which costs $240,000 every year to operate and maintain.

Required:

1. Prepare a simple quality cost report, classifying costs by category. Comment on the quality costs/sales ratio.

2. Discuss the distribution of quality costs among the four categories. Where would you like to see changes (if any) and why?

3. Given your answers to (1) and (2), provide at least three specific suggestions as to how LY could improve overall quality and also reduce total quality costs.

4. Each LY foldable bag has a target weight of 100 grams. Specification limits are 100 grams, plus or minus 10 grams (i.e., 10% of 100g). Bags produced at the upper or lower specification limits cause a loss of $150. A sample of five bags produced yielded the following measures:

Unit number Measured	weight grams
1	101
2	103
3	111
4	93
5	89

During the first quarter 10,000 bags were produced. Hint: remember that the QLF is supposed to help you value the hidden costs within the specification limits!

(a) Calculate the loss for each bag. Calculate the average loss for the sample of five.

(b) Using the average loss, calculate the hidden quality costs for the first quarter.

5. Compare this to a procedure undertaken during LASIK eye surgery where an Excimer Laser is used to reshape the cornea of the eye. This highly specialized laser uses a cool ultraviolet light beam to remove ("ablate") microscopic amounts of tissue from the cornea to reshape it so it more accurately focuses light on the retina for improved vision. For near-sighted people, the goal is to flatten the cornea; with farsighted people, a steeper cornea is desired.1 The amount of tissue to remove for flattening the cornea of near-sighted patients would depend on a case-by-case basis. Assume that for each dioptre of nearsightedness (i.e., every additional -1.00 stated on the prescription), the target amount of tissue to be removed on average is 150 microns (or 0.015cm). For example, a person with a prescription of -1.00 needs 150 microns removed, and a person with a prescription of -2.00 needs 300 microns (2 x 150 microns) removed. As a quality consultant for the medical industry, how would you adjust the values of variables in the QLF equation, and why? For example, how will you adjust c (which is $150 for the bag) and d? Hint: Please think of the severity of consequences of variability for the patent.

6. 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. (a) A drug sold by a pharmaceutical company which is taken for serious illness. (b) Work performed by the customer complaints department at LY Remember: a good measure is one that (among other things): (i) Is based on information you can acquire without too much difficulty!; (ii) Is specific and allows comparison; and (iii) Is time bound.