Section A.

Interim Quality Performance Report

Davis, Inc., had the following quality costs for the years ended December 31, 20x4 and 20x5:

20x4 20x5

Prevention costs:

Quality audits $72,000 $108,000

Vendor certification 112,500 168,750

Appraisal costs:

Product acceptance $90,000 $135,000

Process acceptance 103,000 117,500

Internal failure costs:

Retesting $90,000 $82,000

Rework 200,000 182,000

External failure costs:

Recalls $155,000 $124,000

Warranty 300,000 294,000

At the end of 20x4, management decided to increase its investment in control costs by 50 percent for each category's items with the expectation that failure costs would decrease by 20 percent for each item of the failure categories. Sales were $12,000,000 for both 20x4 and 20x5.

Required:

1. Calculate the budgeted costs for 20x5.

$

Feedback

The costs of quality are associated with two subcategories of quality-related activities: control activities and failure activities.

Prepare interim quality performance report. Enter all answers as positive amounts. If there is no variance enter "0" for your answer. If the budget variance amount is unfavorable select "Unfavorable" in the last column of the table, select "Favorable" if it is favorable, or No effect if there is no change. Round percentage answers to two decimal places. For example, 5.789% would be entered as "5.79".

Davis, Inc.

Interim Standard Performance Report: Quality Costs

For the Year Ended December 31, 20x5

Actual Costs Budgeted Costs Variance Unfavorable, Favorable or No effect

Prevention costs:

Quality audits $ $ No effect

Vendor certification No effect

Total prevention costs $ $ No effect

Appraisal costs:

Product acceptance $ $ No effect

Process acceptance $ Favorable

Total appraisal costs $ $ $ Favorable

Internal failure costs:

Retesting $ $ $ Unfavorable

Rework Unfavorable

Total internal failure costs $ $ $ Unfavorable

External failure costs:

Recalls $ $ No effect

Warranty Unfavorable

Total external failure costs $ $ $ Unfavorable

Total quality costs $ $ $ Unfavorable

Percentage of sales % % % Unfavorable

Feedback

Review the interim quality performance report comparing budgeted and actual performance you have learned in the chapter.

2. What can be inferred from the report regarding the progress Davis has made?

Davis has come very close to meeting the planned outcomes

3. What if sales were $12,000,000 for 20x4 and $15,000,000 for 20x5? What adjustment to budgeted rework costs would be made? (Note: Quality auditing is a discretionary cost and its budget is not affected by the change in sales revenue in 20x5.)

New total budgeted rework costs: $

2. Review the variances arising from comparing actual costs to budgeted costs.

3. To determine if an adjustment would need to be made, consider whether the cost is fixed or variable.

Compare the actual costs for 20x5 to the new budget.

Section B.

Costco nearly $2.5 billion in profit that come from over 700 stores (up from 600 in 2011). Costco focuses on low prices and high volume with a target market of small businesses and large families. The low prices in part comes from an operational strategy that leads to a cost advantage. The assortment is limited; there is usually only one brand for any category, which gives Costco significant market power and logistic efficiencies. Where a typical Walmart Supercenter carries over 140,000 products, Costco carries fewer than 4,000. The items are generally bulk-packaged, which means customers buy more of the item on their Costco trips and the brand involved can justify having Costco sell the brand at a sharply lower price. It has a well-regarded house brand, Kirkland, that is sold at a very low profit margin?around 15 percent mark-up?and generates about 12 percent of the sales. Most products are delivered to the warehouse on shipping pallets and these pallets are used to display products for sale on the warehouse floor. Costco does not have a large advertising budget. Costco has a membership model, which generates a close customer relationship and commitment plus significant revenue since the memberships represent about 15 percent of the value of the firm. The in-store experience is unique with many tasting opportunities, some upscale brands, and a lot of energy. The meat and produce selections have an outstanding quality reputation and include many organic options. Costco was behind in e-commerce in 2016, generating only about 3 percent of sales. The firm had a slow start and a rather poor web presence compared to Amazon and even to its other competitors.

FOR DISCUSSION

1. Why is Costco immune from the Amazon threat? Will that continue going forward? What are the strengths and weaknesses?

2. How should Costco react to the Amazon threat? Besides create more competitive website, is there anything that Costco could do to leapfrog competitors on the e-commerce side?

3. How does Amazon's recent purchase of Whole Foods threaten Costco? What should Costco do in response?

Section c.

Please refer to the financial statements for Microsoft. It is an Excel spreadsheet next to this test.