The managing director of SIGAR plc has recently attended a seminar on Total Quality Management and has
expressed interest in implementing a quality initiative aimed at reducing quality costs within the company. As management accountant, you have been asked to prepare a report detailing the potential gains from the
implementation of a quality programme.
The information gathered is shown below:
|
|
Pre Quality Programme
|
Post Quality Programme
|
|
Material loss due to storage
|
5%
|
3%
|
|
Material loss during processing
|
4%
|
2.5%
|
|
Product and equipment inspection
|
€25,000
|
€15,000
|
|
Product rejected at final inspection
|
12.5%
|
7.5%
|
|
Product returned by customers
|
5%
|
2.5%
|
|
Product liability claims
|
3%of sales revenue
|
1% of sales revenue
|
|
Machine idle time
|
20% of gross hours
|
12.5% of gross hours
|
|
Selling and distribution costs
|
€60,000
|
€50,000
|
|
Machine time per unit produced
|
36 minutes
|
30 minutes
|
The company budgets to produce and sell 5,000 units in the third quarter of 2013. Each ceiling sells for € 100 and requires 8 square metres of plastic sheeting per ceiling which costs € 4 per square metre. Machine operating costs are € 40 per hour.
The units which are rejected at the final production stage and the units which are returned by customers are both sold as "seconds" at a discount of 40% on the standard selling price. The units returned by customers are replaced free of charge and incur additional delivery costs of € 10 per ceiling unit.
It is anticipated that the quality programme would cost € 50,000 to implement.
Requirement
(a) The managing director has asked you to prepare calculations for the third quarter of 2013 showing the following, both before and after implementation of the quality programme:
(i) Total units produced (pre-inspection).
(ii) Purchases of materials.
(iii) Gross machine hours.
Base your calculations on the assumption that budgeted sales will be achieved.
(b) On the basis of the estimated cost savings for the third quarter of 2013, should the company implement the quality program? Explain your answer fully and include appropriate calculations.