Ride Gear Limited, based in Ontario, manufactures after-market accessories for m

Question

Ride Gear Limited, based in Ontario, manufactures after-market accessories for motorcycles, such as fairings, hand guards, seats, and cargo carriers. In its early years of operation, Ride Gear had a reputation for outstanding product quality, which is a key determinant of success in this industry. Competition has become extremely intense in recent years, and Ride Gear has lost market share to companies based in China. In a recent survey of product quality conducted by a leading motorcycle magazine, Ride Gear slipped to fifth place among the top 10 accessory manufacturers. In response to the disappointing results from the market survey, the president of Ride Gear, Dave Rankin, decided to take action in an effort to improve product quality. One of his first steps was to set up a quality improvement team to identify key areas where changes were most needed. Rankin remembered from his managerial accounting course in university that high quality of conformance is the overall objective and that different types of quality costs can interact to improve quality. However, beyond these basic details, Rankin’s recollection of quality costs was limited, so he appointed Gale Smith to lead the quality improvement team and make the changes needed to allow Ride Gear to better compete. Smith’s quality improvement program has now been in operation for two years. The company’s most recent quality cost report is shown below:

RIDE GEAR LIMITED Quality Cost Report (in thousands) Year 1 Year 2 Prevention costs Systems development Quality training Quality improvement projects $ 125 $ 170 20 90 60 Total prevention cost 195 280 Appraisal costs: Testing and inspection of raw materials Final product testing and inspection 90 90 45 50 Total appraisal cost 180 95 Internal failure costs: 150 50 70 45 Scrap, rework labour, and overhead Re-inspection of reworked products Total internal failure cost External failure costs 200 115 150 50 Warranty repairs 70 Product returns and allowances Total external failure cost Total quality cost Total production cost 95 140 $ 775 630 $3,000 $3,300 200

Explanation / Answer

Amount Percentage Amount Percentage Prevention Cost: Systems Development $ 125 4.2% 16.10% $ 170 5.2% 27.00% Quality training 10 0.3% 1.30% 20 0.6% 3.20% Quality projects 60 2.0% 7.70% 90 2.7% 14.30% Total prevention cost 195 6.5% 25.20% 280 8.5% 44.40% Appraisal Costs: Testing & Inspection 90 3.0% 11.60% 45 1.4% 7.10% Final product Testing 90 3.0% 11.60% 50 1.5% 7.90% Total Appraisal cost 180 6.0% 23.20% 95 2.9% 15.10% Internal Failure Costs: Scrap, rework labour & overhead 150 5.0% 19.40% 70 2.1% 11.10% Re-inspection 50 1.7% 6.50% 45 1.4% 7.10% Total internal failure cost 200 6.7% 25.80% 115 3.5% 18.30% External Failure costs: Warranty repairs 150 5.0% 19.40% 45 1.4% 7.10% Product Returns 50 1.7% 6.50% 95 2.9% 15.10% Total External Failure Costs 200 6.7% 25.80% 140 4.2% 15.10% Total Quality Costs 775 25.8% 100% 630 19.1% 100.00% Total Production Costs $3000 $3300

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