In response to intensive foreign competition, the management of Florex Company h

Question

In response to intensive foreign competition, the management of Florex Company has attempted over the past year to improve the quality of its products. A statistical process control system has been installed and other steps have been taken to decrease the amount of warranty and other field costs, which have been trending upward over the past several years. Costs relating to quality and quality control over the last two years (in thousands) are given below: Costs (in thousands) Last Year This Year $900 $570 $240 $1,050 $1,500 180 $1,200 $900 $60 $750 $750 $420 $210 Inspectionn Quality engineering Depreciation of test equipment Rework labor Statistical process control Cost of field servicing Supplies used in testing Systems development Warranty repairs Net cost of scrap Product testing Product recalls Disposal of defective products $0 $ 30 $480 $3,600 $1,050 $630S 1,125 $ 810 $1,200 $750 $975 $2,100 720 Sales have been flat over the past few years, at $75,000,000 per year. A great deal of money has been spent in the effort to upgrade quality, and management is anxious to see whether or not the effort has been effective

Explanation / Answer

The sales have been flat over the past few years at $75,000,000 per year.

Quality Cost Report

The above table shows the Quality Cost Report of Florex company. The cost is classified under four heads viz., prevention cost, appraisal cost, external failure cost and internal failure cost. From the table of quality cost report, it is well depicted that the quality cost have been decreased from 16% to 13.6% of sales. It is identified from the report that the prevention cost have been increased from last year (900) to this year (1500); and the appraisal cost from 1800 to 2400 this year (amount in thousands).

Because of this increase in both prevention and appraisal cost, the internal failure cost have also been increased from 2.4 million to 3.6 million. The basic reason behind the increased internal cost is that the Florex company have incurred more cost for scrap, rework. On the other side, the external failure cost have been decreased from 6.9 miilion last year to 27 this year. This is because that the company is saving huge amount in field servicing (1.6% to 1.2% of sales), warranty repairs (4.8% to 1.4% of sales)and product recalls(2.8% to 1.0% of sales).  

Overall, If the company concentrate on significance on prevention and appraisal costs, its total quality cost would continue to decrease in future years. The appraisal cost should also decrease as a need for inspection and testing. Similarly, the internal failure cost should also be decrease in time as better quality is designed in products.

Last year This Year Amt in thousands % of sales Amt in thousands % of sales Prevention cost Quality engineering $420 0.56 $570 0.76 system development 480 0.64 750 1.00 statistical process control 0 0 180 0.24 Total prevention costs 900 1.0 1500 2.00 Appraisal costs Inspection 750 1.00 900 1.20 Product testing 810 1.08 1200 1.60 Depreciation of test equip 210 0.28 240 0.32 Supplies used in testing 30 0.04 60 0.08 Total appraisal cost 1800 2.4 2400 3.20 Internal failure cost Net cost of scrap 630 0.84 1125 1.50 Rework labor 1050 1.40 1500 2.00 disposal of defective 720 0.96 975 1.30 Total internal failure cost 2400 3.20 3600 4.80 External failure cost Cost of field servicing 1200 1.60 900 1.20 Product recall 2100 2.80 750 1.00 warranty repairs 3600 4.80 1050 1.40 Total external failure cost 6900 9.20 2700 3.60 Total quality cost $12,000 16 $10,200 13.60

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