You are the operations manager for a small kayak and canoe manufacturer (Valley

Question

You are the operations manager for a small kayak and canoe manufacturer (Valley Kayaks) located on the Pacific Northwest (Oregon). Lately your company has experienced product quality problems. Simply put, the kayaks that you produce occasionally have defects and require rework. Consequently, you have decided to assess the impact of introducing a total quality management (TQM) program. After discussing the potential effects with representatives from marketing, finance, accounting, and quality, you arrive at a set of estimates (contained in the following table). Top management has told you that they will accept any proposal that you come up with PROVIDED that it improves the return on assets measure by at least 10 percent. Use Figure 2.3.

Category Current Values Estimated Impact of TQM Sales $ 3,354,000 4 % + (improvement)

Cost of goods sold $ 2,580,000 0 %

Variable expenses $ 430,000 9.50 % (reduction)

Fixed expenses $ 167,700 0 %

Inventory $ 336,000 15 %

Accounts receivable $ 174,000 0 %

Other current assets $ 579,000 0 %

Fixed assets $ 537,000 0 %

Calculate ROA with changes and without changes?

Explanation / Answer

Return assets= Net income/ total assets

Net income= cost of goods sold- variable expenses- fixed expenses

total assets= total current and non current assets

Net income= 2,580,000- 430,000- 167,700= 1,982,300

total assets= 336,000+174,000+579,000+537,000= 1,626,000

ROA= 1,982,300/1,626,000= 1.219 or rounded it as 1.3

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