Kathy Shorts, president of Oliver Company, was concerned with the trend in sales and profitability. The company had been losing customers at an alarming rate. Furthermore, the company was barely breaking even. Investigation revealed that poor quality was at the root of the problem. At the end of 2015, Kathy decided to begin a quality improvement program. As a first step, she identified the following costs in the accounting records as quality related:
2015
Sales (600,000 units @ $100) .......$60,000,000
Retesting .............. 1,800,000
Rework ............... 2,400,000
Vendor certification ............ 720,000
Consumer complaints ........... 1,200,000
Warranty .............. 2,400,000
Test labor .............. 1,800,000
Inspection labor........... 1,500,000
Design reviews............ 180,000
Required:
1. Prepare a quality cost report by quality cost category.
2. Calculate the relative distribution percentages for each quality cost category. Comment on the distribution.
3. Using the Taguchi loss function, an average loss per unit is computed to be $15 per unit.
What are the hidden costs of external failure? How does this affect the relative distribution?
4. Shorts’s quality manager decided not to bother with the hidden costs. What do you think was his reasoning? Any efforts to reduce measured external failure costs will also reduce the hidden costs. Do you agree or disagree? Explain.