Question 2: (Managing Quality) ChaiCha Ltd makes a range of artistic, hand painted teapots. Abby Short, 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. Enthused by the potential for improved quality performance, Abby asked her management accountant (Benny Stout) to estimate the monthly total quality costs incurred by Chaicha. She also asked for a breakdown of ChaiCha's quality costs into four categories: prevention, appraisal; internal failure; and external failure. In response, Benny gathered the following information from 2021: i) Sales revenue is $900,000 and net profit is $135,000 ii) 200 teapots have been returned by customers for repair due to cracks in the bowl or handle. Repair costs are $100 per teapot iii) A full-time quality inspector (who only does final inspections) receives a salary of $50,000. iv) 800 teapots are rejected on final inspection each year, because they do not meet ChaiCha's quality standards. Of these, 80% can be reworked at a cost of $75 per unit. The remaining 20% have to be scrapped, costing $100 per teapot on average. v) Due to poor product performance, a customer cancelled an order that would have increased profits by $25,000. vi) A casual employee is employed in the complaint department, who worked 250 hours in 2021, at an hourly rate of $62 per hour, including on-costs. vii) ChaiCha gave sales allowances of $10,000 due to faulty products being sent to customers. vii) ChaiCha is very careful in selecting and evaluating its suppliers to ensure that they purchase high quality materials for their teapots. Benny estimates that the annual cost of supplier selection is $20,000 (including attending trade shows and visiting potential suppliers' premises). ix) Inspection of the final product also requires a special testing equipment to test if the teapots are waterproof, which costs $10,000 every year to operate and maintain. Required: a) Prepare a cost of quality report. Discuss the quality costs/sales ratio - what does it tell you? 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) Based on your answers to (a) and (b), provide at least two suggestions that could improve ChaiCha's overall quality and reduce its future total quality costs. d) The position of a teapot's spout is important to its overall quality. The spout should be at the same level as the top of the teapot. If it is too high, tea may come out of the lid instead of the spout. If it is too low, the teapot cannot be filled up properly and tea may spill out from the spout. ChaiCha's quality specifications indicate that any teapot with a spout that is 1cm higher or lower than the top of the teapot will be rejected. The quality inspector at ChaiCha toid Abby and Benny that many of the teapots failed the final quality inspection because the position of their spouts does not meet ChaiCha's quality standard. However, many teapots pass the quality inspection because the position of their spouts are only a little bit higher or lower (i.e., less than 1cm) than the top of the teapot. Upon hearing this, Benny is concerned that Chaicha may be underestimating their cost of quality, by not taking into account the quality cost of variability. Explain the difference between the conventional view of quality cost and the Quality Loss Function view of quality cost. In your answer, discuss why the variability in spout quality may be costly for ChaiCha based on the concept of Quality Loss Function. 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) Work performed by the customer complaint officer at Chaicha (which includes answering complaint phone calls and addressing complaints in on-line forums) ii) A company that manufactures and sells disposable and reusable face masks