Question Two: Managing Quality YPop Ltd makes musical jewellery boxes encrusted with opals. It also produces customised jewellery boxes as corporate gifts. Dee-Jay Tapia, the general manager, recently attended a conference on quality and productivity, where he 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. Dee-Jay was enthused by the potential for improved quality performance (If this works, I could get a whopper bonus this year!" she thought). Dee-Jay contacted his management accountant (Pansy Michaels), and requested an estimate of the total quality costs being incurred by YPop, as well as a breakdown of those costs into four categories: Prevention; Appraisal; Internal failure; and External failure. Pansy gathered the following information from 2020: i) Sales revenue is $30,000,000 and net profit is $4,800,000 ii) 6,000 boxes were returned by customers for repair. Repair costs are $50 per box. iii) Six inspectors (who only do final inspections) each receive a salary of $60,000. iv) 30,000 boxes are rejected on final inspection each year (on average), because they did not meet quality standards. Of these, 80% can be reworked at a cost of $50 per unit. The remaining 20% have to be scrapped, costing $150 per box on average. v) Due to poor product performance, a customer cancelled an order that would have increased profits by $300,000. vi) Five employees are employed in the complaint department, on salaries of $45,000 each. YPop gave sales allowances of $250,000 due to faulty products being sent to customers. viii) YPop is very careful in selecting its suppliers to ensure that they purchase high quality jewels for their music boxes. Pansy estimated that the annual cost of supplier selection is $200,000 (including attending trade-shows and visiting potential suppliers' workshops). ix) Inspection of the final product also requires testing equipment, which costs $240,000 every year to operate and maintain. vii) 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) Dee-Jay held a meeting with Pansy to discuss the cost of quality report and commented: "The COQ report is a terrible report on our quality performance. About half of our costs relate to scrap and rework. I believe the root cause of these costs is the amount of inspection we do. Eliminating inspection will reduce total quality costs by more than 50%. Everyone knows that the more you conduct testing, the more defects you find! Inspection after all is a non- value adding activity and should be eliminated anyway." Do you agree with Dee-Jay's comments? Explain you answer. d) Regardless of Dee-Jay's comments, based on your answers to (a) and (b), provide at least three suggestions that could improve YPop's overall quality and reduce total quality costs. 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 complaints department at YPop (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
