Innovative PC Ltd

Innovative PC Ltd has just completed its second trading year, having been set up under a Business Enterprise Scheme. It markets its own brand of personal computers which it assembles in its own industrial unit.

The computer packages it markets is an IBM Pentium 5 clone, consisting of a 120 Gb hard disk computer, Super VGA monitor and a Laser printer. It boasts several advanced features and the package is considered competitively priced retailing at Rs35,000 per unit.

The company is organized into four separate departments: Sales and Marketing (including after sales service), Engineering (Product Development), Manufacturing, and Company Service (Finance and Personnel).

In reviewing its first full trading year, the Managing Director feels that it is possible to improve the profitability of the operation even at the current level of production. The Managing Director has instigated a Total Quality Program and following the first training workshop, he has asked his Finance Director to work with the other directors in getting a fix on what costs are being expended on Quality and related activities.

The list of items attached represents the first stab at ascertaining the figures for the company.

The monthly salaries, proportionate to 180 working hours, for the following staff are as follows:

General Manager Rs200,000

Production Manager Rs80,000

Sales Manager Rs50,000

Service Engineer Rs20,000

Sales Administrative Executive Rs15,000

Quality Inspector Rs9,000

During that year,

1. An additional allowance of Rs450,000 was paid for checking again the units, rectifying faults and administering shortage claims.

2. Two service engineers were employed full-time to support pre-delivery problems.

3. The warranty bill amounted to Rs500,000 including loss of use claims.

4. 25% of the Sales Manager's time was taken up with validating 'loss of use' claims, 10% of the General Mangers time was taken up with sorting out quality problems, 40% of the Production Managers time was devoted to solving poor quality problems.

5. Two quality inspectors were assigned to carry out 100% inspection at reception.

6. A lawyer was retained at the cost of Rs150,000 per annum to arbitrate on 'loss of use' claims for which the Sales Manager is unable to agree settlement to the customer's satisfaction.

7. A major re-work programme involving Rs110,000 sets, which required the fitment of a fan to prevent overheating, was completed.

8. Product liability insurance amounted to Rs250,000.

9. A marketing survey was completed by a consultancy firm in preparation for the European launch at the cost of Rs140,000.

10. One sales administration executive spent half of his time progressing dealer backorders and administering dealer shortages.

11. Compilation of user manuals was subcontracted at a cost of Rs600,000.

12. A major error in the user manuals resulted in re-issue of one section at a cost of Rs225,000.

13. Quality planning and quality training amounted to Rs500,000 and Rs980,000 respectively.

14. The company purchased Rs195,000 worth of quality testing equipment.

You are required to analyze fully the above case study and:

(A)Produce a Quality Cost report using the PAF model. [35 marks]

(B)Make recommendations on how the quality cost can be reduced. [5 marks]