Answer the following questions using the information below:
Cysco Corp has a budget of $1,200,000 in 2015 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $100,000 in variable costs. The new method will require $50,000 in training costs and $140,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 200,000 units.
Appraisal costs for the year are budgeted at $500,000. The new prevention procedures will save appraisal costs of $50,000. Internal failure costs average $30 per failed unit of finished goods. The internal failure rate is expected to be 5% of all completed items. The proposed changes will cut the internal failure rate by one-half. Internal failure units are destroyed. External failure costs average $50 per failed unit. The
company's average external failures average 2.5% of units sold. The new proposal will reduce this rate to 1%. Assume all units produced are sold and there are no ending inventories.
9) What is the net change in the budget of prevention costs if the procedures are automated in 2015? Will management agree with the changes? A) $100,000 decrease, yes B) $90,000 decrease, yes C) $100,000 increase, no D) $90,000 increase, yes Answer: D
Explanation: D) New costs: Training $ 50,000 New equipment 140,000 $190,000 Savings (100,000) Net increase in budget $ 90,000 Diff: 2
Objective: 3
AACSB: Application of knowledge
10) How much will appraisal costs change assuming that the new prevention methods reduce material failures by 30% in the appraisal phase? A) $150,000 decrease B) $229,000 decrease C) $50,000 increase D) $50,000 decrease Answer: D
Explanation: D) The new prevention procedures will save appraisal costs of $50,000.
Diff: 2
Objective: 3
AACSB: Application of knowledge
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11) How much will internal failure costs change if the internal product failures are reduced by 40% with the new procedures? A) $138,000 decrease B) $126,000 decrease C) $120,000 decrease D) $84,000 increase Answer: C
Explanation: C)
Internal failure rate (200,000 × 0.05) 10,000 Cost per unit × $30 Total $300,000 Savings rate × 0.40 Savings $120,000 Diff: 3
Objective: 3
AACSB: Application of knowledge
12) How much do external failure costs change if all the changes are as the new prevention procedures anticipated? Assume all units produced are sold and there are no ending inventories. A) $126,000 decrease B) $150,000 decrease C) $100,000 decrease D) $122,400 decrease Answer: B
Diff: 3
Objective: 3
AACSB: Application of knowledge
13) Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive changes? A) $185,200 B) $(230,000) C) $(234,000) D) $(250,000) Answer: B
Explanation: B)
Prevention changes, net $ 90,000 Appraisal changes, net (50,000) Internal failure changes, net (120,000) External failure changes, net (150,000) Net of all changes $ (230,000) Diff: 3
Objective: 3
AACSB: Application of knowledge
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14) Relevant-cost and relevant-revenue analysis uses the allocated costs as the base for calculating the costs of a quality improvement program. Answer: FALSE
Explanation: Allocated costs are usually ignored in calculating the costs of a quality improvement program.
Diff: 2
Objective: 3
AACSB: Analytical thinking
15) Strykerz Corp expects to spend $800,000 in 2015 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $60,000 in fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves $140,000 in training costs and an additional $150,000 in annual equipment rental.
Internal failure costs average $160 per failed unit of finished goods. During 2014, 5% of all completed items had to be reworked. External failure costs average $400 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used.
How much will external failure costs change assuming 800,000 units of materials are received and that product failures with customers are cut in half with the new receiving method? A) $20,000 increase B) $400,000 decrease C) $640,000 decrease D) $800,000 decrease Answer: B
Explanation: B)
External failure ((800,000/4) × 1% × $400) $800,000 Failure reduction of 50% × 0.50 Savings $400,000 Diff: 3
Objective: 3
AACSB: Application of knowledge
16) In successful quality programs, companies decrease costs of quality and, in particular, internal and external failure costs as a percentage of revenues. Answer: TRUE
Diff: 2
Objective: 3
AACSB: Analytical thinking
17) The financial cost of quality measures serves as a common denominator for evaluating trade-offs among prevention costs and failure costs. Answer: TRUE
Diff: 2
Objective: 3
AACSB: Analytical thinking
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18) COQ reports provide more insight about quality improvements and allow managers to compare trends over time. Answer: TRUE
Diff: 2
Objective: 3
AACSB: Analytical thinking
19) Cost of quality financial measures will usually deteriorate when nonfinancial measures of quality are emphasized and improved. Answer: FALSE
Explanation: Financial cost of quality measures and nonfinancial measures complement each other.
Diff: 2
Objective: 3
AACSB: Analytical thinking
20) Venlaz Corp makes small motorcycles. The monthly demand ranges from 80 to 100 motorcycles. The average demand is 92 motorcycles. The plant operates 300 hours a month. Each cycle takes approximately 1.5 hours.
If the company adds a new line of scooters, initial demand will be 20 per month. Each scooter will take 1 hour to make. To offset approaching production capacity, expanding the assembly line is possible. This will decrease manufacturing time for all products by 20%. However, this will increase the costs of cycles from $400 to $500 and scooters from $200 to $240. The change will also cause increases in prices from $700 to $750 for cycles and from $450 to $500 for scooters.
Required:
a. What is the average waiting time for cycles if they are the only item manufactured?
b. What are the average waiting times if both cycles and scooters are produced and the assembly line is not enlarged?
c. What are the average waiting times if both cycles and scooters are produced and the assembly line is enlarged?
d. What is the expected monthly margin without scooters if the company sells all 92 cycles it manufactures?
e. What are the expected monthly contribution margins if scooters are made with the current assembly line and with the new assembly line? Assume average sales and that sales equal production.
f. What action do you recommend?
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Answer:
a. Waiting time = [92 × (1.5)2] / {[2 × [300 hr. a month - (92 × 1.5)]} = 0.639 hours
b. WT = (92 × (1.5)2) + (20 × 1) / {2 × [300 - (92 × 1.5) - (20 × 1)]} = 227/284 = 0.799 hours
c. WT = (92 × (1.2)2) + (20 × (0.8)2) / {2 × [300 - (92 × 1.2) - (20 × 0.8)]} = 145.28/347.2 = 0.418 hours
d. Expected monthly margin without scooters: Motorcycle sales (92 × $700) $64,400 Manufacturing costs (92 × $400) 36,800 Expected margin $27,600 e. Without changing assembly line: Motorcycle sales (92 × $700) $64,400 Scooter sales (20 × $450) 9,000 Total expected sales 73,400 Manufacturing costs: Motorcycles (92 × $400) $36,800 Scooters (20 × $200) 4,000 40,800 Expected margin $32,600 With new assembly line: Motorcycle sales (92 × $750) $69,000 Scooter sales (20 × $500) 10,000 Total expected sales 79,000 Manufacturing costs: Motorcycles (92 × $500) $46,000 Scooters (20 × $240) 4,800 50,800 Expected margin $28,200 f. Unless there are critical customer relation problems with a slower response time, the scooters should be added without changing the assembly line. The expected margin is $4,400 higher without the new assembly line ($32,600 - $28,200).
Diff: 3
Objective: 3
AACSB: Application of knowledge
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