Maxwell Company had sales of $30,000,000 in 2006. In 2010, sales had increased to $37,500,000. A quality improvement program was implemented at the beginning of 2006. Overall conformance quality was targeted for improvement. The quality costs for 2006 and 2010 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.
2. Calculate the relative distribution of costs by category for 2006. 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?
3. Calculate the relative distribution of costs by category for 2010. What do you think of the level and distribution of quality costs? (A pie chart or bar graph may be of some help.) Do you think further reductions are possible?
4. The quality manager for Maxwell indicated that the external failure costs reported are only the measured costs. He argued that the 2010 external costs were much higher than those reported and that additional investment ought to be made in control costs. Discuss the validity of his viewpoint.
5. Suppose that the manager of Maxwell received a bonus equal to 10 percent of the quality cost savings each year. Do you think that gain sharing is a good or a bad idea? Discuss the risks of gain sharing.

Transcribed Image Text:

2006 2010 Internal failure costs External failure costs Appraisal costs Prevention costs $2,250,000 3,000,000 1,350,000 s 112,500 75,000 281,250 468,750 S937,500 900,000 oral quality costs7.500000$937 500 $7,500,000