Question 3 Cost of Quality Report Scrabbling Enterprises (SE) is a pioneer in designing and producing scrabbling devices. SE's products were brilliantly designed, but management neglected the manufacturing process; as a consequence, quality problems have been chronic. When customers complained about defective units, SE simply sent a repairperson or replaced the defective unit. Recently, several competitors introduced similar products with much higher quality, causing SE's sales to decline. The firm's market share declined from 60 to 40 percent in 2006. To rescue the situation, SE embarked on an intensive campaign to strengthen its quality control at the beginning of 2007. These efforts met with some success; the downward slide in sales was reversed, and the firm's market share increased from 40 percent in 2006 to 45 per- cent in 2007. To help monitor the company's progress, costs relating to quality and quality control were compiled for the previous year (2006) and for the first full year of the quality campaign (2007). The costs, which do not include the lost sales due to a reputation for poor quality, appear in thousands: Product recalls Systems development Inspection Net cost of scrap Supplies used in testing Warranty repairs Rework labor Statistic al process control Customer returns of defective goods Cost of testing equipment Quality engineering Downtime due to quality problems 2007 R 600 680 2 770 1,300 40 2 800 1 600 270 200 390 1 650 1 100 2006 R3 500 120 1 700 800 30 3 300 1 400 - 3,200 270 1 080 600 Required 1.Prepare a quality cost report for both 2006 and 2007. Carry percentage computations to two decimal places. 2. Prepare a histogram showing the distribution of the various quality costs by category. 3. Write an analysis to accompany the reports you have prepared in requirements 1 and 2 on the effectiveness of the changes the firm made in the last year. 4. Suppose that the firm has just learned that its major competitor has reduced its price by 20 percent. SE can afford to lower its price only if it can cut costs. A sales manager suggests that the firm can reduce quality engineering and inspection work until the market stabilizes. The manager also points out that reduced inspections will decrease the net cost of scrap and losses of downtime due to quality problems. Do you agree