QUALITY COSTS: PROFIT IMPROVEMENT AND DISTRIBUTION ACROSS CATEGORIES, GAINSHARING Pawnee Company had sales of $30,000,000 in 2003. In 2007, sales had increased to $37,500,000. A quality improvement...

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QUALITY COSTS: PROFIT IMPROVEMENT AND DISTRIBUTION ACROSS CATEGORIES, GAINSHARING
Pawnee Company had sales of $30,000,000 in 2003. In 2007, sales had increased to $37,500,000. A
quality improvement program was implemented at the beginning of 2003. Overall conformance
quality was targeted for improvement. The quality costs for 2003 and 2007 follow. Assume any
changes in quality costs are attributable to improvements in quality.
Required:
1. Compute the quality cost-to-sales ratio for each year. Is this type of improvement possible?
Pawnee Company
Quality Costs
Year 2003 Cost as %
sales
Year 2007 Cost as %
sales
Sales $ 30,000,000 37500000
1.Internal failure costs $ 2250000 7.50 112500 0.3
2.External failure costs $ 3000000 10.00 75000 0.20
3.Appraisal costs 1350000 4.50 281250 0.75
4.Prevention costs 900000 3.00 468750 1.25
Total quality costs 7,500,000 25.00 937,500 2.5
Yes. Such type of Improvement possible. We can see it has happened in a four year period by proper
implementation of a Qualty Improvement Program. Here we see the Internal and External failure
costs have drastically come down by the implementation of Quality Improvement Program.
Later part the Prevention and Appraisal costs are coming down even though they are the major
components of Quality costs in year 2007.
2. Calculate the relative distribution of costs by category for 2003. What do you think of the way
costs are distributed? (A pie chart or bar graph may be of some help.) How do you think they will be
distributed as the company approaches a zero-defects state?
Here we see the costs are distributed in such a way the External failures are at the highest (40% of
the Total Quality costs) followed by internal failure costs (around 30% of Total Quality costs).
The appraisal...