Cost-of-Quality (COQ) Reporting Carrie Lee, the president of Lee Enterprises, was concerned about the results of her company's new quality control efforts. "Maybe the emphasis we've placed on upgrading our quality control system will pay off in the long run, but it doesn't seem to be helping us much right now. I thought improved quality would give a real boost to sales, but sales have remained flat at about $10,000,000 for the last two years."
Lee Enterprises has seen its market share decline in recent years because of increased foreign competition. An intensive effort to strengthen the quality control system was initiated a year ago (on January 1, 2011) in the hope that better quality would strengthen the company's competitive position and reduce warranty and servicing costs. The following costs (in thousands) relate to quality and quality control over the last two years:
|
|
2010
|
2011
|
|
Warranty repairs
|
$420
|
$140
|
|
Rework labor
|
140
|
200
|
|
Supplies used in testing
|
4
|
6
|
|
Depreciation of testing equipment
|
22
|
34
|
|
Warranty replacements
|
60
|
18
|
|
Field servicing
|
180
|
120
|
|
Inspection
|
76
|
120
|
|
Systems development
|
64
|
106
|
|
Disposal of defective products
|
54
|
76
|
|
Net cost of scrap
|
86
|
124
|
|
Product recalls
|
340
|
82
|
|
Product testing
|
98
|
160
|
|
Statistical process control
|
-
|
74
|
|
Quality engineering
|
56
|
80
|
Required
1. Prepare a spreadsheet that produces a cost-of-quality (COQ) report for both 2010 and 2011. Carry per- centage computations to two decimal places.
2. Use your spreadsheet to prepare a histogram showing the distribution of the various quality costs by category. (Note: Your histogram should include results for both 2010 and 2011.)
3. Prepare a written evaluation to accompany the reports you have prepared in requirements 1 and 2. This evaluation should discuss the distribution of quality costs in the company, changes in this distribution that you detect have taken place over the last year, and any other information you believe would be use- ful to management.
4. A member of the management team believes that employees will be more conscientious in their work if they are held responsible for mistakes. He suggests that workers should do rework on their own time and that they also should pay for disposal of defective units and the cost of scraps. The proposal estimates that the firm can save another $400,000 in quality costs and the employees are less likely to make as many errors. Should the firm implement the proposal? Why or why not?