The Omega Shoe Company manufactures a number of different styles of athletic sho
ID: 390975 • Letter: T
Question
The Omega Shoe Company manufactures a number of different styles of athletic shoes. Its biggest seller is the X-pacer running show. In 2010 Omega implemented a quality management program. The company's show production for 2010 and 2011 and manufacturing costs are as follows: 3) Units produced/input Manufacturing cost Percent good quality 2011 34,600 278,000 $291,000 2010 32,000 | 78% 83% Only 25% of the defective shoes can be reworked, at a cost of $2 a piece. Compute the manufacturing cost for each of the two years and indicate the percentage of decrease or increase in cost due to the quality improvement program.Explanation / Answer
Percentage of defective shoes that can be reworked = 25%
Cost of reworking per piece = $2
Production data for 2010
Initial Manufacturing cost = $278,000
Total units produced in = 32,000
Percent good quality products = 78%
Total good quality products quantity = 32,000 * 0.78 = 24,960 units
Total rework quantity = 32,000 * (1 - 0.78) * 0.25 = 1760 units
Total quantity of products = 24,960 + 1760 = 26,720 units
Total rework cost = 1760 * 2 = $3520
Total manufacturing cost = Initial Manufacturing cost + Total rework cost
= 278,000 + 3520
= $281,520
Cost per unit of product = Total manufacturing cost / Total quantity of products
= 281,520 / 26,720
= $10.536
Production data for 2011
Initial Manufacturing cost = $291,000
Total units produced in = 34,600
Percent good quality products = 83%
Total good quality products quantity = 34,600 * 0.83 = 28,718 units
Total rework quantity = 34,600 * (1 - 0.83) * 0.25 = 1470.5 units
Total quantity of products = 28,718 + 1470.5 = 30188.5 units
Total rework cost = 1470.5 * 2 = $2941
Total manufacturing cost = Initial Manufacturing cost + Total rework cost
= 291,000 + 2941
= $293,941
Cost per unit of product = Total manufacturing cost / Total quantity of products
= 293,941 / 30188.5
= $9.736
The percentage decrease in cost = [(10.536 - 9.736) / 10.536] * 100
= 7.59%
Hence we can say that the quality improvement program has been beneficial.
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