Question 1 - Quality Control
Design Products is committed to its quality program. It works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For 20x1 it has budgeted $1,000,000 for prevention costs and $800,000 for appraisal costs. Internal failure has a budget of $100 per failed item, while external failure has a total budget of $600,000.
Product Testing has proposed to management a change in the 20x1 budget for a new method of testing products. If management decides to implement the new method, $2 per unit of appraisal costs will be saved, up to a level of 200,000 tests. No additional savings are incurred past the 200,000 level. The new method involves $110,000 in training costs and $60,000 in yearly testing supplies.
Traditionally, 3% of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories.
Required:
a. What is the adjusted budget for appraisal costs assuming the new method is implemented and 800,000 units are tested during the manufacturing process during 20x1?
b. How much do internal failure costs change assuming 600,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40%?
c. What would be the change in the external failure budget assuming external failures are reduced by 60%, assuming the same facts as in part (b)?
Question 2 - Theory of Constraints, Throughput Contribution, and Relevant Costs of Quality
Carlyle Industries manufactures chemical compounds for lawn fertilizer in two departments: mixing and packing. Additional information on the two departments follows.
Mixing Packing Capacity per hour 150 kg 250 boxes Monthly capacity 24,000 kg 40,000 boxes Monthly production 20,000 kg 38,000
Fixed operating costs $55,000 $85,500
Fixed operating cost (per kg or box) $2.75 $2.25
Each box requires 500 g of mixed chemical compound. Because the packing department has a capacity of only 40,000 boxes per month, the mixing department can only make a maximum 20,000 kg per month. All costs are fixed other than direct materials since this is an automated facility. The company incurs $40,000 in direct materials for the mixing departments and $57,000 in direct materials for the packing department. The packing department makes only 38,000 boxes from 20,000 kg of chemical. There is a loss of 5% of the direct materials mixture when the product is packed. Each box of fertilizer sells for $10. Consider each of the following requirements independently from each other.
Required -
a. An outside contractor makes the following offer. If Carlyle will supply the contractor with 2000 kg of mixed chemical, the contractor will manufacture 3800 boxes of fertilizer (allowing for the normal loss of 5% of direct materials) at $4.5. Should Carlyle accept the offer? Show calculations.
b. Another company offers to prepare 2000 kg of chemical mixture a month from direct materials that Carlyle supplies. The company will charge $2.50 per kg of mixture. Should Carlyle accept the offer? Show calculations.
c. Carlyle's engineers have devised a method that would improve quality in the packing department. They estimate that the chemical currently being lost would be saved. The modification would costs $15,000 per month. Should Carlyle implement this new method? Show calculations.