Carl Wallace, the president of Ritch Plastic Company, is a famous cost cutter in the plastics industry. Two years ago, he accepted an offer from Ritch€™s board of directors to help the company cut costs quickly. In fact, Mr. Wallace€™s compensation package included a year-end bonus tied to the percentage of cost decrease over the preceding year. On February 12, 2012, Mr. Wallace received comparative financial information for the two preceding years. He was especially interested in the results of his cost-cutting measures on quality control. The quality report shown below was extracted from the company€™s financial information.
Required
a. Explain the strategy that Mr. Wallace initiated to control Ritch€™s costs.
b. Indicate whether the strategy was successful or unsuccessful in reducing quality costs.
c. Explain how the strategy will likely affect the company€™s business in the long term.

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2011 2010 Amount Percentage Amount Percentage Prevention costs $ 65,000 26,000 15,000 20,000 Engineering and design Training and education Depreciation on prevention equipment 6.57% $69,000 76,000 15,000 20,000 7.39% 2.63 8.14 1.51 1.60 2.14 Incentives and awards 2.02 Total prevention Appraisal costs Product and materials inspection Reliability testing Testing equipment (depreciation) Supplies Total appraisal 126,000 12.73% 180,000 19.27% 33,000 27,000 38,000 10,000 108,000 3.33 73,000 67,000 7.82 2.73 7.17 38,000 16,000 3.83 4.07 1.01 1.71 20.77% 10.90% 194,000 Internal failure costs Scrap Repair and rework Downtime Reinspection 52,000 5.25 120,000 12.85 16.06 46,000 4.65 150,000 64,000 8,000 6.46 40,000 24,000 4.28 0.81 2.57 Total internal failure 170,000 17.17% 334,000 35.76% External failure cost Warranty repairs and replacement Freight Customer relations Restocking and packaging 125,000 31,000 28,000 42,000 35.05 347,000 13.38 7.58 3.32 75,000 45,000 119,000 4.55 12.02 3.00 4.50 59.20% 24.20% 100.00% Total external failure 226,000 586,000 Grand total $990,000 100.00% $934,000