Rachel Boyce, President of a company that manufactures electronic components, has a number of questions concerning quality and quality costs. She has heard a few things about quality and has asked you to respond to the following:

1. What does it mean to have a quality product or service? Explain how product quality and conformance are related.
2. Yesterday, my quality manager told me that we need to redefine what we mean by a defective product. He said that conforming to specifications ignores the cost of product variability and that further reduction of product variability is a veritable gold mine just waiting to be mined. What did he mean?
3. Morrison Company had sales of $20,000,000 in 2000. In 2004 sales had increased to $25,000,000. A quality improvement program was implemented at the beginning of 2000. Overall conformance quality was targeted for improvement. The quality cost for 2000 and 2004 are shown below. Assume any changes in quality costs are attributable to improvements in quality:

2000 2004

$ $

Internal failure costs 1,500,000 75,000

External failure costs 2,000,000 50,000

Appraisal costs 900,000 187,500

Prevention costs 600,000 312,500

Total Quality Costs 5,000,000 625,000

Required:

1. Compute the quality cost-to-sales ratio for each year
2. The quality manager for Morrison Company indicated that the external failure costs reported are only the measured costs. He argued that 2004 external costs were much higher than those reported and that additional investment ought to be made in control costs. Discuss the validity of his view point.

Suppose the manager of Morrison received a bonus equal to 10% of the quality cost savings each year. Do you think that gainsharing is a good idea? Discuss the risks of gainsharing.