Quality Costs: Profit Improvement and Distribution Across Categories, Gainsharing

Muskogee Company had sales of $60,000,000 in 20x1. In 20x5, sales had increased to $75,000,000. A quality improvement program was implemented at the beginning of 20x1. Overall conformance quality was targeted for improvement. The quality costs for 20x1 and 20x5 follow. Assume any changes in quality costs are attributable to improvements in quality.

	20x1		20x5
Internal failure costs	$4,500,000		$225,000
External failure costs	6,000,000		150,000
Appraisal costs	2,700,000		562,500
Prevention costs	1,800,000		937,500
Total quality costs	$15,000,000		$1,875,000

Required:

1. Compute the quality cost-to-sales ratio for each year. Round your answers to three decimal places when rounding is required.

20x1	fill in the blank 1
20x5	fill in the blank 2

Is this type of improvement possible?

2. Calculate the relative distribution of costs by category for 20x1. Enter your answers as whole percentage values (for example, 6% would be entered as "6").

Internal failure	fill in the blank 4	%
External failure	fill in the blank 5	%
Appraisal	fill in the blank 6	%
Prevention	fill in the blank 7	%

Select a pie chart that shows how costs are distributed.

a.		b.
c.		d.

The correct answer is b

3. Calculate the relative distribution of costs by category for 20x5.

Internal failure	fill in the blank 9	%
External failure	fill in the blank 10	%
Appraisal	fill in the blank 11	%
Prevention	fill in the blank 12	%

Select a pie chart that shows the level and distribution of quality costs.

a.		b.
c.		d.

The correct answer is d

4. Suppose that the manager of Muskogee received a bonus equal to 10 percent of the quality cost savings each year. Do you think that gainsharing is a good or a bad idea? Good idea