CHAPTER 19

BALANCED SCORECARD: QUALITY, TIME, AND THE THEORY OF

CONSTRAINTS
19-1 Quality costs (including the opportunity cost of lost sales because of poor quality) can be
as much as 10% to 20% of sales revenues of many organizations. Qualityimprovement
programs can result in substantial cost savings and higher revenues and mar!et share from
increased customer satisfaction.
19-2 Quality of design refers to ho" closely the characteristics of a product or service meet the
needs and "ants of customers. #onformance quality refers to the performance of a product or
service relative to its design and product specifications.
19-3 $%hibit 1&1 of the te%t lists the follo"ing si% line items in the prevention costs category'
design engineering( process engineering( supplier evaluations( preventive equipment
maintenance( quality training( and testing of ne" materials.
19-4 )n internal failure cost differs from an e%ternal failure cost on the basis of "hen the
nonconforming product is detected. )n internal failure is detected before a product is shipped to
a customer* "hereas an e%ternal failure is detected after a product is shipped to a customer.
19-5 +hree methods that companies use to identify quality problems are' (a) a control chart
"hich is a graph of a series of successive observations of a particular step* procedure* or
operation ta!en at regular intervals of time( (b) a ,areto diagram* "hich is a chart that indicates
ho" frequently each type of failure (defect) occurs* ordered from the most frequent to the least
frequent( and (c) a causeandeffect diagram* "hich helps identify potential causes of failure.
19-6 -o* companies should emphasize financial as "ell as nonfinancial measures of quality*
such as yield and defect rates. -onfinancial measures are not directly lin!ed to bottomline
performance but they indicate and direct attention to the specific areas that need improvement to
improve the bottom line. +rac!ing nonfinancial measures over time directly reveals "hether
these areas have* in fact* improved over time. -onfinancial measures are easy to quantify and
easy to understand.
19-7 $%amples of nonfinancial measures of customer satisfaction relating to quality include
the follo"ing'
1. the number of defective units shipped to customers as a percentage of total units of product
shipped(
2. the number of customer complaints(
.. delivery delays (the difference bet"een the scheduled delivery date and date requested by
customer)(
/. ontime delivery rate (percentage of shipments made on or before the promised delivery
date)(
0. customer satisfaction level "ith product features (to measure design quality)(
1. mar!et share( and
2. percentage of units that fail soon after delivery.
1&1
19- $%amples of nonfinancial measures of internalbusinessprocess quality'
1. the percentage of defects for each product line(
2. process yield (rates of good output to total output at a particular process(
.. manufacturing lead time (the amount of time from "hen an order is received by production
to "hen it becomes a finished good)( and
/. number of product and process design changes
19-9 #ustomerresponse time is ho" long it ta!es from the time a customer places an order for
a product or a service to the time the product or service is delivered to the customer.
3anufacturing lead time is ho" long it ta!es from the time an order is received by
manufacturing to the time a finished good is produced. 3anufacturing lead time is only one part
of customerresponse time. 4elays in delivering an order for a product or service can also occur
because of delays in receiving customer orders and delays in delivering a completed order to a
customer.
#ustomer
response
time
5
6rder
receipt
time
7
6rder
manufacturing
lead time
7
6rder
delivery
time
19-1! -o. +here is a tradeoff bet"een customerresponse time and ontime performance.
8imply scheduling longer customerresponse time ma!es achieving ontime performance easier.
#ompanies should* ho"ever* attempt to reduce the uncertainty of the arrival of orders* manage
bottlenec!s* reduce setup and processing time* and run smaller batches. +his "ould have the
effect of reducing both customerresponse time and improving ontime performance.
19-11 +"o reasons "hy lines* queues* and delays occur is (1) uncertainty about "hen customers
"ill order products or services99uncertainty causes a number of orders to be received at the same
time* causing delays* and (2) limited capacity and bottlenec!s99a bottlenec! is an operation
"here the "or! to be performed approaches or e%ceeds the available capacity.
19-12 -o. )dding a product "hen capacity is constrained and the timing of customer orders is
uncertain causes delays in delivering all e%isting products. :f the revenue losses from delays in
delivering e%isting products and the increase in carrying costs of the e%isting products e%ceed the
positive contribution earned by the product that "as added* then it is not "orth"hile to ma!e and
sell the ne" product* despite its positive contribution margin. +he chapter describes the negative
effects (negative e%ternalities) that one product can have on others "hen products share common
manufacturing facilities.
19-13 +he three main measures used in the theory of constraints are the follo"ing'
1. throughput contribution equal to revenues minus direct material cost of the goods sold(
2. investments equal to the sum of materials costs in direct materials* "or!inprocess and
finished goods inventories* research and development costs* and costs of equipment and
buildings(
.. operating costs equal to all costs of operations such as salaries* rent* and utilities (other than
direct materials) incurred to earn throughput contribution.
1&2
19-14 +he four !ey steps in managing bottlenec! resources are'
8tep 1' ;ecognize that the bottlenec! operation determines throughput contribution of the
entire system.
8tep 2' 8earch for* and identify the bottlenec! operation.
8tep .' <eep the bottlenec! operation busy* and subordinate all nonbottlenec! operations to the
bottlenec! operation.
8tep /' :ncrease bottlenec! efficiency and capacity.
19-15 +he chapter describes several "ays to improve the performance of a bottlenec! operation.
1. $liminate idle time at the bottlenec! operation.
2. ,rocess only those parts or products at the bottlenec! operation that increase throughput
contribution* not parts or products that "ill remain in finished goods or spare parts
inventories.
.. 8hift products that do not have to be made on the bottlenec! machine to nonbottlenec!
machines or to outside processing facilities.
/. ;educe setup time and processing time at bottlenec! operations.
0. :mprove the quality of parts or products manufactured at the bottlenec! operation.
1&.
1&.11 (.0 min.) C"#$# "% &'()*$+,
1. +he ratios of each #6Q category to revenues and to total quality costs for each period are as follo"s'
C"#$-., I./,: S-0*-(..'() C"#$# "% Q'()*$+ R-1"2$
3*. $4"'#(.5#6
673!72!!9 1273172!!9 673!72!1! 1273172!1!
A/$'()
8 "%
R-9-.'-#
8 "% T"$()
Q'()*$+
C"#$# A/$'()
8 "%
R-9-.'-#
8 "% T"$()
Q'()*$+
C"#$# A/$'()
8 "%
R-9-.'-#
8 "% T"$()
Q'()*$+
C"#$# A/$'()
8 "%
R-9-.'-#
8 "% T"$()
Q'()*$+
C"#$#
326 : 336 : 356 : 366 : 36 : 396 : 3116 : 3126 :
316 316 ; <,24! 316 ; <2,!4! 346 346 ; <9,!! 346 ; <2,159 376 376 ; <9,3!! 376 ; <1,6!5 31!6 31!6 ; <9,!2!31!6 ; <1,271
,revention costs
3achine maintenance = //0 = //0 = .&0 = ..0
8upplier training 20 100 00 /0
4esign revie"s 00 21/ 210 200
+otal prevention costs 010 1.2% 20.0% 20/ >..% ./.&% 100 2.0% /0.0% 020 1..% //.&%
)ppraisal costs
:ncoming inspection 10> 12. &0 1.
?inal testing ..2 ..2 2&. 20.
+otal appraisal costs //0 0..% 21.1% /00 0.0% 21.1% .>. /.1% 2..&% 211 ..0% 20.&%
:nternal failure costs
;e"or! 2.1 202 110 112
8crap 12/ 111 21 12
+otal internal failure costs .00 /..% 12./% .1> ..0% 1/.2% 2.1 2.0% 1/.2% 12& 2.0% 1/.1%
$%ternal failure costs
@arranty repairs 110 >0 22 1>
#ustomer returns 020 0/2 21/ 1>>
+otal e%ternal failure costs 2.0 >.&% .1.0% 1.2 2.0% 2&..% ..1 ..1% 20.&% 201 2.>% 20.1%
+otal quality costs =2*0/0 2/.2% 100.0% =2*10& 2..>% 100.0% =1*100 12.2% 100.0% =1*221 1/.1% 100.0%
+otal production and revenues =>*2/0 =&*0>0 =&*.00 =&*020
1&/
2. ?rom an analysis of the #ost of Quality ;eport* it "ould appear that #osten* :nc.As
program has been successful because'
+otal quality costs as a percentage of total revenues have declined from 2/.2% to
1/.1%.
$%ternal failure costs* those costs signaling customer dissatisfaction* have declined
from >.&% of total revenues to 2.>% of total revenues and from .1% of all quality
costs to 20.1% of all quality costs. +hese declines in "arranty repairs and customer
returns should translate into increased revenues in the future.
:nternal failure costs as a percentage of revenues have been halved from /..% to 2%.
)ppraisal costs have decreased from 0..% to .% of revenues. ,reventing defects
from occurring in the first place is reducing the demand for final testing.
Quality costs have shifted to the area of prevention "here problems are solved before
production starts' total prevention costs (maintenance* supplier training* and design
revie"s) have risen from 20% to //.&% of total quality costs. +he =10*000 increase in
these costs is more than offset by decreases in other quality costs.
Because of improved designs* quality training* and additional preproduction
inspections* scrap and re"or! costs have almost been halved "hile increasing sales
by &.0%.
,roduction does not have to spend an inordinate amount of time "ith customer
service since they are no" ma!ing the product right the first time and "arranty
repairs and customer returns have decreased.
.. +o estimate the opportunity cost of not implementing the quality program and to help her
ma!e her case* Cessica +olmy could have assumed that'
8ales and mar!et share "ould continue to decline if the quality program "as not
implemented and then calculated the loss in revenue and contribution margin.
+he company "ould have to compete on price rather than quality and calculated the
impact of having to lo"er product prices.
6pportunity costs are not recorded in accounting systems because they represent the results of
"hat might have happened if the company had not improved quality. -evertheless* opportunity
costs of poor quality can be significant. :t is important for #osten to ta!e these costs into account
"hen ma!ing decisions about quality.
1&0
19-17 (20 min.) C"#$# "% &'()*$+ (.()+#*#,
1. )ppraisal cost 5 :nspection cost
5 =0 D 100*000 car seats
5 =000*000
2. :nternal failure cost 5 ;e"or! cost
5 0% D 100*000 D =1
5 0*000 D =1 5 =0*000
.. 6ut of poc!et e%ternal failure cost 5 8hipping cost 7 ;epair cost
5 2% D 100*000 D (=10 7 =1)
5 2*000 D =11 5 =22*000
/. 6pportunity cost of e%ternal failure 5 Eost future sales
5 (2% D 100*000) D 20% D =000
5 /00 car seats D =000 5 =200*000
0. +otal cost of quality control 5 =000*000 7 0*000 7 22*000 7 200*000
5 =222*000
1. Quality control costs under the alternative inspection technique'
)ppraisal cost 5 =1.00 D 100*000 5 =100*000
:nternal failure cost 5 2.0% D 100*000 D =1 5 =2*000
6ut of poc!et e%ternal failure cost 5 /.0% D 100*000 D (=10 7 1)
5 /*000 D =11 5 =/&*000
6pportunity cost of e%ternal failure 5 /*000 car seats D 20% D =000
5 &00 car seats D =000 5 =/00*000
+otal cost of quality control 5 =100*000 7 2*000 7 /&*000 7 /00*000
5 =102*000
2. :n addition to the lo"er costs under the alternative inspection plan* 8afe ;ider should consider
a number of other factors'
a. +here could easily be serious reputation effects if the percentage of e%ternal failures
increases by 220% (from 2% to /.0%). +his rise in e%ternal failures may lead to costs
greater than =000 per failure due to lost sales.
b. Figher e%ternal failure rates may increase the probability of la"suits.
c. Government intervention is a concern* "ith the chances of government regulation
increasing "ith the number of e%ternal failures.
1&1
19-1 (10 min.) C"#$ "% &'()*$+ (.()+#*#, -$4*/() /".#*5-2($*".# 3/".$*.'($*". "% 19-176,
1. #ost of improving quality of plastic 5 =20 D 100*000 5 =2*000*000
2. +otal cost of la"suits 5 2 D =200*000 5 =1*000*000
.. @hile economically this may seem li!e a good decision* qualitative factors should be more
important than quantitative factors "hen it comes to protecting customers from harm and
inHury. :f a product can cause a customer serious harm and inHury* an ethical and moral
company should ta!e steps to prevent that harm and inHury. +he companyAs code of ethics
should guide this decision.
/. :n addition to ethical considerations* the company should consider the societal cost of this
decision* reputation effects if "ord of these problems lea!s out at a later date* and
governmental intervention and regulation.
1&2
19-19 (20 min.) N".%*.(./*() 0-(#'2-# "% &'()*$+ (.5 $*0-.
1.

2!!9 2!1!
,ercentage of defective units
shipped
100
5 0%
2*000

/00
5 /%
10*000

#ustomer complaints as a
percentage of units shipped
100
5 2.0%
2*000

200
5 2.0%
10*000

,ercentage of units re"or!ed
during production
120
5 1%
2*000

200
5 2%
10*000

3anufacturing lead time as a
percentage of total time from
order to delivery
10
5 00%
.0

11
5 02%
2>

2. Quality has by and large improved. +he percentage of defects has decreased by 1% and
the number of customer complaints has decreased by 0%. +he former indicates an increase in the
quality of the cell phones being produced. +he latter has positive implications for future sales.
Fo"ever* the percentage of units re"or!ed has also increased. @#, should loo! into the reason
for the increase. 6ne possible e%planation is the fivefold increase in production that may have
resulted in a higher percentage of errors. @#, should do a rootcause analysis to identify
reasons for the additional re"or!. ?inally* the average time from order placement to order
delivery has decreased. 8o customers are receiving their orders on a timelier basis. But
manufacturing lead time is a higher fraction of customer lead time. @#, should see! "ays to
reduce manufacturing lead time. ?or e%ample* process improvements could reduce both re"or!
and manufacturing lead time. )ny reduction in manufacturing lead time "ould help to further
reduce customer response time.
.. 3anufacturing lead time 5 "ait time 7 manufacturing time. ,roducing 10*000 cell
phones in 2010 may have required more "aiting time for each order than the "aiting time from
producing 2*000 cell phones in 200&. 3anufacturing lead time may have increased as more time
"as spent on ma!ing products "ith fe"er defects and reducing re"or! activities.
#ustomer response time 5 receipt time 7 manufacturing lead time 7 delivery time.
3anufacturing lead time is a subset of customer response time. Eo"er customer response time
times is due to order processing efficiency andIor delivery efficiency and not manufacturing lead
time.
1&>
19-2! (20 min.) Q'()*$+ *012"9-0-.$, 2-)-9(.$ /"#$#, (.5 2-)-9(.$ 2-9-.'-#,
1. ;elevant costs over the ne%t year of choosing the ne" lens 5 =00 20*000 copiers 5
=1*100*000
R-)-9(.$ B-.-%*$# "9-2
$4- N-=$ Y-(2 "% C4""#*.>
$4- N-? L-.#
Costs of quality items
8avings in re"or! costs
=>0 12*>20 re"or! hours
8avings in customersupport costs
=/0 &00 customersupporthours
8avings in transportation costs for parts
=.10 200 fe"er loads
8avings in "arranty repair costs
=&0 2*000 repairhours
Opportunity costs
#ontribution margin from increased sales
Cost savings and additional contribution margin
=1*0.0*000
.1*000
22*000
1.0*000
1*>00*000
=.*01>*000
Because the e%pected relevant benefits of =.*01>*000 e%ceed the e%pected relevant costs of the
ne" lens of =1*100*000* ,hoton should introduce the ne" lens. -ote that the opportunity cost
benefits in the form of higher contribution margin from increased sales is an important
component for Hustifying the investment in the ne" lens.
2. +he incremental cost of the ne" lens of =1*100*000 is less than the incremental savings in
re"or! and repair costs of =1*21>*000 (=1*0.0*000 7 =.1*000 7 =22*000 7 =1.0*000). +hus* it is
beneficial for +echno,rint to invest in the ne" lens even "ithout ma!ing any additional sales.
1&&
19-21 (20 min.) N".%*.(./*() &'()*$+ 0-(#'2-#, ".-$*0- 5-)*9-2+,
1. +he data seem to support the concerns e%pressed by #hec!erAs headquarters. 8tore 2 has the
lo"est percentage of late deliveries and the highest customer satisfaction scores. 6n the other
hand* 8tore / has the highest percentage of late deliveries and the lo"est customer satisfaction
score. Both 8tores 1 and . fall bet"een the t"o e%tremes and have similar customer satisfaction
scores.
2.
P-2/-.$(>- "%
L($- D-)*9-2*-#
3X6
A9-2(>- O9-2())
S($*#%(/$*".
3Y6
Fighest observation of late delivery percentage 20 2
Eo"est observation of late delivery percentage 0 /
4ifference 20 9 2
)verage overall satisfaction 5 a 7 b D ,ercentage of late deliveries

2
8lope coefficient ( ) 5 0.10
20
b


Jsing high observation* #onstant (a) 5 2 7 0.10 D 20 5 /.0
Jsing lo" observation* #onstant (a) 5 / 7 0.10 D0 5 /.0
)verage overall satisfaction 5 /.0 9 0.10 D ,ercentage of late deliveries
:f the percentage of late deliveries increases from 0% to 2%*
)verage overall satisfaction 5 /.0 9 0.10 D 2 5 ..>
.. #hec!ers must estimate the profit implications of lost customer satisfaction due to failure to
meet guaranteed delivery times. :n addition* the company needs information about the value
customers place on the delivery guarantee. #ustomers may choose to order from #hec!ers
because of the guarantee. Because failure to meet the guarantee represents a cost* #hec!ers needs
to compare this e%pected cost to the additional sales and profits attributable to the guarantee.
3oreover* the delivery guarantee should motivate employees to strive for ontime delivery.
)fter all* store profits on "hich store managers bonuses are based "ill be lo"er because of the
=0 discount if pizzas are not delivered on time. 8tore managers "ho vie" the guarantee as a
K"in"inL situation should also be educated on the longterm effects that late deliveries have on
the company if overall customer satisfaction declines. 6ne possibility is to modify the bonus
scheme so that ontime delivery is e%plicitly "eighted in the bonus calculation.
1&10
19-22 330 min.) @(*$*.> $*0-, #-29*/- *.5'#$2+,
1. :f 83JAs advisors e%pect to see .00 students each day and it ta!es an average of 12 minutes to
advise each student* then the average time that a student "ill "ait can be calculated using the
follo"ing formula'
( )
( )
2
5
)verage number
+ime ta!en to
advise a student
of students per day
@ait time
3a%imum amount )verage number
+ime ta!en to
2
advise a student
of students per day of time available
_

,
1 1 _

1 1
, ] ]
5
( )
[ ]
2
.00 12
2 10 advisors 10 hours 10 minutes .00 12

1
]

5
[ ]
/.*200
2 1* 000 .* 100
5 & minutes
2. )t /00 students seen a day*
( )
( )
2
5
)verage number
+ime ta!en to
advise a student
of students per day
@ait time
)verage amount
3a%imum amount +ime ta!en to
2
of time available advise a student
of students per day
_

,
1 1 _

1 1
, ] ]
5
( )
[ ]
2
/00 12
2 10 advisors 10 hours 10 minutes /00 12

1
]

5
[ ]
02*100
2 1* 000 /*>00
5 2/ minutes
.. :f the average time to advise a student is reduced to 10 minutes* then the average "ait time
"ould be
5
( )
( )
2
)verage number
+ime ta!en to
advise a student
of students per day
)verage amount
3a%imum amount +ime ta!en to
2
of time available advise a student
of students per day
_

,
1 1 _

1 1
, ] ]
5
( )
[ ]
2
/00 10
2 10 advisors 10 hours 10 minutes /00 10

1
]

5
[ ]
/0*000
2 1* 000 /* 000
5 10 minutes
1&11
1&.2. (20 min.) @(*$*.> $*0-, /"#$ /".#*5-2($*".#, (.5 /'#$"0-2 #($*#%(/$*".
3/".$*.'-5 %2"0 19-246,
1. i) :f 83J hires t"o more advisors then the average "ait time "ill be'
5
( )
( )
2
)verage number
+ime ta!en to
advise a student
of students per day
)verage amount
3a%imum amount +ime ta!en to
2
of time available advise a student
of students per day
_

,
1 1 _

1 1
, ] ]
5
( )
[ ]
2
/00 12
2 12 advisors 10 hours 10 minutes /00 12

1
]

5
[ ]
02*100
2 2* 200 /*>00
5 12 minutes
ii) :f 83J has its current employees "or! 1 days a "ee! and has them advise .00 students
a day then the average "ait time "ill be'
5
( )
( ) ( )
2
)verage number
+ime ta!en to
advise a student
of students per day
3a%imum amount
+ime ta!en to
)verage amount 2
of time available
of students per day
advise a student
_

,
1 1

1 1
1
] ]
5
( )
[ ]
2
.00 12
2 10 advisors 10 hours 10 minutes .00 12

1
]

5
( )
[ ]
00*/00
2 1* 000 /* 200
5 1/ minutes

2. i) #ost if 83J hires 2 e%tra advisors for the registration period'
)dvisor salary cost 5 12 advisors D10 days D =100 5 =12*000
ii) #ost if 83J has its 10 advisors "or! 1 days a "ee! for the registration period'
)dvisor salary cost 5 10 advisors D 10 days D =100 7 10 advisors D 2 days D =100 5 =1.*000
)lternative (i) is less costly for 83J.
.. Firing t"o e%tra advisors has a shorter "aiting time and a lo"er cost than e%tending the
"or!"ee! to 1 days during the registration period. Fo"ever* the quality of the advising may not
be as high. +he temporary advisors may not be as familiar "ith the requirements of the
university. +hey may also be una"are of ho" to "or! "ithin the system (i.e.* they may not be
a"are of alternatives that may be available to help students).
1&12
19-24 (10 min.) M(.'%(/$'2*.> /+/)- $*0-, 0(.'%(/$'2*.> /+/)- -%%*/*-./+,
1. 3anufacturing cycle efficiency (3#$) is defined as follo"s'
3#$ 5 Malueadded manufacturing time N +otal manufacturing time
8o 3#$ in +orrance 3anufacturing is'
3#$ 5 / days of processing time N 22 days total manufacturing time 5 0.1>
2. 3anufacturing cycle time 5 +otal time from receipt of an order by production until its completion.
3anufacturing cycle time 5 (> 7 1 7 2 7 / 7 2) days 5 22 days
19-25 (20 min.) T4-"2+ "% /".#$2(*.$#, $42"'>41'$ /".$2*A'$*"., 2-)-9(.$ /"#$#,
1. ?inishing is a bottlenec! operation. +herefore* producing 1*000 more units "ill generate
additional throughput contribution and operating income.
:ncrease in throughput contribution (=22 9 =.2) 1*000 =/0*000
:ncremental costs of the Higs and tools .0*000
-et benefit of investing in Higs and tools =10*000
3ayfield should invest in the modern Higs and tools because the benefit of higher throughput
contribution of =/0*000 e%ceeds the cost of =.0*000.
2. +he 3achining 4epartment has e%cess capacity and is not a bottlenec! operation.
:ncreasing its capacity further "ill not increase throughput contribution. +here is* therefore* no
benefit from spending =0*000 to increase the 3achining 4epartmentOs capacity by 10*000 units.
3ayfield should not implement the change to do setups faster.
.. ?inishing is a bottlenec! operation. +herefore* getting an outside contractor to produce
12*000 units "ill increase throughput contribution.
:ncrease in throughput contribution (=22 9 =.2) 12*000 =/>0*000
:ncremental contracting costs =10 12*000 120*000
-et benefit of contracting 12*000 units of finishing =.10*000
3ayfield should contract "ith an outside contractor to do 12*000 units of finishing at =10 per
unit because the benefit of higher throughput contribution of =/>0*000 e%ceeds the cost of
=120*000. +he fact that the cost of =10 per unit is double 3ayfieldOs finishing cost of =0 per unit
is irrelevant.
/. 6perating costs in the 3achining 4epartment of =1/0*000* or => per unit* are fi%ed costs.
3ayfield "ill not save any of these costs by subcontracting machining of /*000 units to Funt
#orporation. +otal costs "ill be greater by =11*000 (=/ per unit /*000 units) under the
subcontracting alternative. 3achining more filing cabinets "ill not increase throughput
contribution* "hich is constrained by the finishing capacity. 3ayfield should not accept FuntOs
offer. +he fact that FuntOs costs of machining per unit are half of "hat it costs 3ayfield inhouse
is irrelevant.
1&1.
19-26 (10 min.) T4-"2+ "% /".#$2(*.$#, $42"'>41'$ /".$2*A'$*"., &'()*$+,
1. #ost of defective unit at machining operation "hich is not a bottlenec! operation is the
loss in direct materials (variable costs) of =.2 per unit. ,roducing 2*000 units of defectives does
not result in loss of throughput contribution. 4espite the defective production* machining can
produce and transfer >0*000 units to finishing. +herefore* cost of 2*000 defective units at the
machining operation is =.2 2*000 5 =1/*000.
2. ) defective unit produced at the bottlenec! finishing operation costs 3ayfield materials
costs plus the opportunity cost of lost throughput contribution. Bottlenec! capacity not "asted in
producing defective units could be used to generate additional sales and throughput contribution.
#ost of 2*000 defective units at the finishing operation is'
Eoss of direct materials =.2 2*000 = 1/*000
?orgone throughput contribution (=22 9 =.2) 2*000 >0*000
+otal cost of 2*000 defective units =1//*000
)lternatively* the cost of 2*000 defective units at the finishing operation can be calculated as the
lost revenue of =22 2*000 5 =1//*000. +his line of reasoning ta!es the position that direct
materials costs of =.2 2*000 5 =1/*000 and all fi%ed operating costs in the machining and
finishing operations "ould be incurred any"ay "hether a defective or good unit is produced.
+he cost of producing a defective unit is the revenue lost of =1//*000.
1&1/
19-27 (.0 min.) Q'()*$+ *012"9-0-.$, 2-)-9(.$ /"#$#, (.5 2-)-9(.$ 2-9-.'-#,
6ne "ay to present the alternatives is via a decision tree* as sho"n belo".
+he idea is to first evaluate the best action that +homas should ta!e if it implements the
ne" design (that is* ma!e or not ma!e +&21). +homas can then compare the best mi% of products
to produce if it implements the ne" design against the status quo of not implementing the ne"
design.
1. +homas has capacity constraints. 4emand for M212 valves (.20*000 valves) e%ceeds
production capacity of ..0*000 valves (. valves per hour 110*000 machinehours). 8ince
capacity is constrained* +homas "ill choose to sell the product that ma%imizes contribution
margin per machinehour (the constrained resource).
#ontribution margin per
5
machinehour for M212
=> per valve . valves per hour 5 =2/

#ontribution margin per
5
machinehour for +&21
=10 per valve 2 valves per hour 5 =20.
+homas should reHect Cac!son #orporationAs offer and continue to manufacture only
M212 valves.
1&10
Implement

newdesign
Do not implement

newdesign

Make T971
Do not make T971
2. -o" compare the alternatives of (a) not implementing the ne" design versus
(b) implementing the ne" design. By implementing the ne" design* +homas "ill save 10*000
machinehours of re"or! time. +his time can then be used to ma!e and sell .0*000 (. valves per
hour 10*000 hours) additional M212 valves. +he relevant costs and benefits of implementing
the ne" design follo"'
+he relevant costs of implementing the ne" design =(.10*000)
;elevant benefits'
(a) 8avings in re"or! costs (=.
a
per M212 valve .0*000 valves) &0*000
(b) )dditional contribution margin from selling another
.0*000 M212 valves (. valves per hour 10*000 hours)
because capacity previously used for re"or! is freed up
(=> per valve .0*000 units) 2/0*000
-et relevant benefit = 10*000
a
-ote that the fi%ed re"or! costs of equipment rent and allocated overhead are irrelevant* because these costs
"ill be incurred "hether +homas implements or does not implement the ne" design.
+homas should implement the ne" design since the relevant benefits e%ceed the relevant
costs by =10*000.
.. +homas #orporation should also consider other benefits of improving quality. ?or
e%ample* the process of quality improvement "ill help +homasOs managers and "or!ers gain
e%pertise about the product and the manufacturing process that may lead to further cost
reductions in the future. :mproving quality "ithin the plant is also li!ely to translate into
delivering better quality products to customers. +he increased reputation and customer good"ill
may "ell lead to higher future revenues through greater unit sales and higher sales prices.
1&11
19-2 (.0 min.) Q'()*$+ *012"9-0-.$, 2-)-9(.$ /"#$#, (.5 2-)-9(.$ 2-9-.'-#,
1. By implementing the ne" method* +an "ould incur additional direct materials costs on all
the 200*000 units started at the molding operation.
)dditional direct materials costs 5 =/ per lamp 200*000 lamps =>00*000
+he relevant benefits of adding the ne" material are'
:ncreased revenue from selling .0*000 more lamps
=/0 per lamp .0*000 lamps =1*200*000
-ote that +an #orporation continues to incur the same total variable costs of direct
materials* direct manufacturing labor* setup labor and materials handling labor* and the same
fi%ed costs of equipment* rent* and allocated overhead that it is currently incurring* even "hen it
improves quality. 8ince these costs do not differ among the alternatives of adding the ne"
material or not adding the ne" material* they are e%cluded from the analysis. +he relevant
benefit of adding the ne" material is the e%tra revenue that +an "ould get from producing
.0*000 good lamps.
)n alternative approach to analyzing the problem is to focus on scrap costs and the
benefits of reducing scrap.
+he relevant benefits of adding the ne" material are'
a. #ost savings from eliminating scrap'
Mariable cost per lamp* =1&
a

.0*000 lamps = 020*000
b. )dditional contribution margin from selling
another .0*000 lamps because .0*000 lamps
"ill no longer be scrapped'
Jnit contribution margin =21
b
.0*000 lamps 1.0*000
+otal benefits to +an of adding ne" material to improve quality =1*200*000
a
-ote that only the variable scrap costs of =1& per lamp (direct materials* =11 per lamp( direct manufacturing labor* setup
labor* and materials handling labor* =. per lamp) are relevant because improving quality "ill save these costs. ?i%ed
scrap costs of equipment* rent* and other allocated overhead are irrelevant because these costs "ill be incurred "hether
+an #orporation adds or does not add the ne" material.
b
#ontribution margin per unit
8elling price =/0.00
Mariable costs'
4irect materials costs per lamp =11.00
3olding department variable manufacturing costs
per lamp (direct manufacturing labor* setup labor* and
materials handling labor) ..00
Mariable costs (1&.00)
Jnit contribution margin =21.00
6n the basis of quantitative considerations alone* +an should use the ne" material.
;elevant benefits of =1*200*000 e%ceed the relevant costs of =>00*000 by =/00*000.
2. 6ther nonfinancial and qualitative factors that +an should consider in ma!ing a decision
include the effects of quality improvement on'
a. gaining manufacturing e%pertise that could lead to further cost reductions in the
future(
b. enhanced reputation and increased customer good"ill "hich could lead to higher
future revenues through greater unit sales and higher sales prices( and
1&12
c. higher employee morale as a result of higher quality.
19-29 (.09/0 min.) S$($*#$*/() &'()*$+ /".$2"), (*2)*.- "1-2($*".#,
1. +he 7 2 rule "ill trigger a decision to investigate "hen the roundtrip fuel usage is
outside the control limit'
3ean 7 2 5 200 7 2 5 200 7 (2 20) or 110 to 2/0 gallonunits
)ny fuel usage less than 110 gallonunits or greater than 2/0 gallonunits "ill trigger a decision
to investigate.
+he only plane to be outside the specified 7 2 fuel usage control limit is the 8pirit of
8acramento on flights P0 (2/2 gallonunits)* P2 (2/& gallonunits)* and P10 (2// gallonunits).
2. 8olution $%hibit 1&2& presents the 8Q# charts for each of the three 2/2s.
+he 8pirit of )tlanta has no observation outside the 7 2 control limits. Fo"ever* there
"as an increase in fuel use in each of the last nine roundtrip flights. +he probability of nine
consecutive increases from an incontrol process is very lo"* and this is a trend that should be
investigated.
+he 8pirit of Boston appears in control regarding fuel usage.
+he 8pirit of 8acramento has three observations outside the 7 2 control limits.
3oreover* the mean of the fuel usage for the last si% flights is 2.> gallonunits compared to a
mean of 20> gallonunits for the first four flights. +here is a rising trend* and some observations
are already greater than the acceptable upper limits for fuel consumption. +his should be
investigated.
.. +he advantage of using dollar fuel costs as the unit of analysis in an 8Q# chart is that it
focuses on a variable of overriding concern to top managers (operating costs).
Fo"ever* the disadvantages of using dollar fuel costs are'
a. 8plit responsibilities. 6perations managers may not control the purchase of fuel* and
may "ant to e%clude from their performance measures any variation stemming from
factors outside their control.
b. 6ffsetting factors may mas! important underlying trends "hen the quantity used and
the price paid are combined in a single observation. ?or e%ample* decreasing gallon
usage may be offset by increasing fuel costs. Both of these individual patterns are
important in budgeting for an airline.
c. +he distribution of fuel usage in gallons may be different from the distribution of fuel
prices per gallon. 3ore reliable estimates of the and parameters might be
obtained by focusing separately on the individual usage and price distributions.
Note' +he above disadvantages are most mar!ed if actual fuel prices are used. +he use of
standard fuel prices can reduce many of these disadvantages.
1&1>
SOLUTION EBHIBIT 19-29
,lots of ;ound+rip ?uel Jsage for Cetrans )irlines
S1*2*$ "% A$)(.$( F'-) C".#'01$*".
110
1>0
200
220
2/0
0 2 / 1 > 10 12
F)*>4$ N'0A-2
C
(
)
)
"
.
-
'
.
*
$
#
Mean +2 sigma
Mean -2 s igma
Mean=200 gall-units
S1*2* $ "% B"#$". F'-) C".#'01$* ".
110
1>0
200
220
2/0
0 2 / 1 > 10 12
F)*>4$ N'0A-2
C
(
)
)
"
.
-
'
.
*
$
#
Mean +2 s igma
Mean -2 s igma
Mean=200 gall-units
S1*2*$ "% S(/2(0-.$" F'-) C".#'01$* ".
110
1>0
200
220
2/0
0 2 / 1 > 10 12
F)* >4$ N'0A-2
C
(
)
)
"
.
-
'
.
*
$
#
Me an=200 ga ll-unit s
Mea n + 2 sigma
Me an - 2 sigma
1&1&
x
x
x
x
x
x
x
x
x
x
19-3! (.09/0 min.) C"01-.#($*". )*.D-5 ?*$4 12"%*$(A*)*$+, ".-$*0- 5-)*9-2+, (.5 -=$-2.()
&'()*$+-1-2%"20(./- 0-(#'2-#,
1. E(.,-E'.- E')+-D-/,
Philadelphia
)dd' ,rofitability
1% of operating income =101*000 =101*000
)dd' )verage "aiting time
=00*000 if Q 10 minutes 00*000 0
4educt' ,atient satisfaction
=00*000 if Q 20 0 0
+otal' Bonus paid =101*000 =101*000
Baltimore
)dd' ,rofitability
1% of operating income =&0*000 = &*000
)dd' )verage "aiting time
=00*000 if Q 10 minutes 0 00*000
4educt' ,atient satisfaction
=00*000 if Q 20 (00*000 ) 0
+otal' Bonus paid =/0*000 =0&*000
2. Operating income as a measure of profitability
6perating income captures revenue and costrelated factors. Fo"ever* there is no recognition of
investment differences bet"een the t"o groups. :f one group is substantially bigger than the
other* differences in size alone give the president of the larger group the opportunity to earn a
bigger bonus. )n alternative approach "ould be to use return on investment (perhaps relative to
the budgeted ;6:).
15 minute benchmark as a measure of patient response time
+his measure reflects the ability of 3id)tlantic Fealthcare to meet a benchmar! for patient
response time. 8everal concerns arise "ith this specific measure'
a. :t is a yesorno cutoff. ) 11 minute "aiting time earns no bonus* but neither does a
t"o hour "ait. 3oreover* no e%tra bonus is paid for additional "aiting time
reductions belo" 10 minutes. )n alternative is to have the bonus that increases "ith
greater "aiting time improvements.
b. :t can be manipulated. 4octors might quic!ly ma!e initial contact "ith a patient to
meet the benchmar!* but then leave the patient sitting in the e%amination room for a
more detailed e%amination or procedure to ta!e place.
c. :t reflects performance relative only to the initial "aiting time. :t does not consider
other timerelated issues such as the "ait for an appointment or the time needed to fill
out forms.
1&20
,roblems in (b) and (c) can be overcome by measuring total patient response time (such as ho"
long it ta!es from the time a patient ma!es an appointment to the time the actual appointment is
concluded)* in addition to average "aiting time to meet the doctor.
Patient satisfaction as a measure of quality
+his measure represents a common method for assessing quality. Fo"ever* there are several
concerns "ith its use'
a. ,atient satisfaction is li!ely to be influenced by a number of factors that are outside
the groupsA control* such as ho" sic! the patients are "hen coming in or the e%tent to
"hich they follo" doctorsA orders.
b. :t is influenced by the questions as!ed in the survey and the survey methodology. )s
a result* is li!ely to be KnoisyL or very sensitive to assumptions.
c. ,atient satisfaction is not the same as patient health outcomes* an important measure
of healthcare quality.

) combination of measures may "or! "ell as a composite measure of quality.
.. 3ost companies use both financial and nonfinancial measures to evaluate performance*
sometimes presented in a single report such as a balanced scorecard. Jsing multiple measures of
performance enables top management to evaluate "hether lo"erlevel managers have improved
one area at the e%pense of others. ?or e%ample* did the better average "aiting time (and patient
satisfaction) bet"een Culy and 4ecember in the Baltimore group result from significantly higher
e%penditures that contributed to the dramatic reduction in operating incomeR
)n important issue is the relative importance to place on the different measures. :f "aiting time
is not used for performance evaluation* managers "ill concentrate on increasing operating
income and give less attention to "aiting time* even if "aiting time has a significant influence on
"hether customers choose 3id)tlantic Fealthcare or another healthcare provider "hen given
the choice. Fo"ever* the president of the Baltimore group received a larger bonus in the second
half of the year due in part to lo"er average "aiting time* even though operating profits dropped
by nearly &0%. #ompanies must understand the relative importance of different financial and
nonfinancial obHectives "hen using multiple measures for performance evaluation.
1&21
19-31 (209.0 min.) @(*$*.> $*0-#, 0(.'%(/$'2*.> )-(5 $*0-#,
1. )verage "aiting time for an order of S.&
)nnual average number 3anufacturing time
2
of orders of S.&
D
per order of S.&
5
)nnual machine )nnual average number 3anufacturing time

2 D
capacity
9
of orders of S.&
D
per order of S.&
5
T00 D (>0)
2
U
5
(00 D 1*/00)
5
.20*000
5 110 hours per order
2 D T0*000 9 (00 D >0)U 2 D (0*000 9 /*000) (2 D 1*000)
)verage manufacturing )verage order "aiting 6rder manufacturing time
lead time for S.&
5
time for S.&
7 for S.&
5 110 hours 7 >0 hours 5 2/0 hours per order
2. )verage "aiting time for S.& and V2>
)nnual average number D 3anufacturing time
2
7 )nnual average number D 3anufacturing time
2
of orders of S.& per order of S.& of orders of V2> per order of V2>
2 D )nnual machine )nnual 3anufacturing )nnual 3anufacturing
capacity 9 average number D time per order 9 average number D time per order
of orders of S.& of S.& of orders of V2> of V2>
T00 D (>0)
2
U 7 T20 D (20)
2
U T(00 D 1*/00) 7 (20 D /00)U (.20*000 7 10*000)
2 D T0*000 9 (00 D >0) 9 (20 D 20)U 2 D T0*000 9 /*000 9 000U 2 D 000

1*000
..0*000
5 ..0 hours
)verage manufacturing
lead time for S.&
5
)verage order
"aiting time
7
6rder manufacturing
time for S.&
5 ..0 hours 7 >0 hours 5 /10 hours
)verage manufacturing
lead time for V2>
5
)verage order
"aiting time
7
6rder manufacturing
time for V2>
5 ..0 hours 7 20 hours 5 .00 hours
1&22
19-32 (10 min.) @(*$*.> $*0-#, 2-)-9(.$ 2-9-.'-#, (.5 2-)-9(.$ /"#$#
3/".$*.'($*". "% 19-316,
1. +he direct approach is to loo! at incremental revenues and incremental costs.
8elling price per order of V2>* "hich has
an average manufacturing lead time of .00 hours = >*000
Mariable cost per order 0*000
)dditional contribution per order of V2> .*000
3ultiply by e%pected number of orders D 20
:ncrease in e%pected contribution from V2> =20*000
$%pected loss in revenues and increase in costs from introducing V2>
E=1-/$-5 L"## *. E=1-/$-5 I./2-(#- *. E=1-/$-5 L"## *.
R-9-.'-# %2"0
C(22+*.> C"#$# %2"0R-9-.'-# P)'#
I./2-(#*.> A9-2(>- I./2-(#*.> A9-2(>- E=1-/$-5 I./2-(#-#
M(.'%(/$'2*.> L-(5 M(.'%(/$'2*.> L-(5 *. C(22+*.> C"#$# "%
P2"5'/$ T*0-# %"2 A)) P2"5'/$# T*0-# %"2 A)) P2"5'/$# I.$2"5'/*.> Y2
316 326 336 346 : 326 F 336
S.& =20*000.00
a
=1*.20.00
b
=.1*.20.00
V2> 9 2*1>2.00
c
2*1>2.00
+otal =20*000.00 =>*012.00 =..*012.00
a
00 orders D (=22*000 9 =21*000)
b
(/10 hours 9 2/0 hours) D =0.20 D 00 orders
c
(.00 hours 9 0) D =0.20 D 20
:ncrease in e%pected contribution from V2> of =20*000 is greater than increase in
e%pected costs of =..*012.00 by =/1*/.2.00. +herefore* 8;G should introduce V2>.
)lternative calculations of incremental revenues and incremental costs of introducing V2>'
A)$-2.($*9- 2:
A)$-2.($*9- 1: D" N"$ R-)-9(.$ R-9-.'-#
I.$2"5'/- Y2 I.$2"5'/- Y2 (.5 R-)-9(.$ C"#$#
316 326 336 : 316 G 326
$%pected revenues =1*020*000.00
a
=1*.00*000.00
b
=120*000.00
$%pected variable costs >20*000.00
c
200*000.00
d
120*000.00
$%pected inv. carrying costs 12*012.00
e
&*000.00
f
>*012.00
$%pected total costs >&2*012.00 20&*000.00 1..*012.00
$%pected revenues minus
e%pected costs = 1.2*/.2.00 = 0&1*000.00 = /1*/.2.00
a
(00 D =21*000) 7 (20 D =>*000)
b
00 D =22*000
c
(00 D =10*000) 7 (20 D =0*000)
d
00 D =10*000
e
(00 D =0.20 D /10) 7 (20 D =0.20 D .00)
f
00 D =0.20 D 2/0
1&2.
2. 8elling price per order of V2>* "hich has an average
manufacturing lead time of more than .20 hours = 1*000
Mariable cost per order 0*000
)dditional contribution per order of V2> = 1*000
3ultiply by e%pected number of orders D 20
:ncrease in e%pected contribution from V2> =20*000
$%pected loss in revenues and increase in costs from introducing V2>'
E=1-/$-5 L"## *. E=1-/$-5 I./2-(#- *. E=1-/$-5 L"## *.
R-9-.'-# %2"0 C(22+*.> C"#$# %2"0 R-9-.'-# P)'#
I./2-(#*.> A9-2(>- I./2-(#*.> A9-2(>- E=1-/$-5 I./2-(#-#
M(.'%(/$'2*.> L-(5 M(.'%(/$'2*.> L-(5 *. C(22+*.> C"#$# "%
P2"5'/$ T*0-# %"2 A)) P2"5'/$# T*0-# %"2 A)) P2"5'/$# I.$2"5'/*.> Y2
316 326 336 346 : 326 F 336

S.& =20*000.00
a
=1*.20.00
b
=.1*.20.00
V2> 9 2*1>2.00
c
2*1>2.00
+otal =20*000.00 =>*012.00 =..*012.00
a
00 orders D (=22*000 9 =21*000)
b
(/10 hours 9 2/0 hours) D =0.20 D 00 orders
c
(.00 hours 9 0) D =0.20 D 20
:ncrease in e%pected contribution from V2> of =20*000 is less than increase in e%pected costs of
=..*012.00 by =>*012.00. +herefore* 8;G should not introduce V2>.
1&2/
19-33 (/0/0 min.) M(.'%(/$'2*.> )-(5 $*0-#, 2-)-9(.$ 2-9-.'-#, (.5 2-)-9(.$ /"#$#,
1a. )verage "aiting time for an order of B2 if Brandt manufactures only B2
5
1
]
1

,
_

,
_

,
_

B2 for time
ing 3anufactur
B2 of orders of
number )verage
capacity
machine )nnual
2
2
B2 for time
ing 3anufactur
B2 of orders of
number )verage
5
)U /0 120 ( 000 * 1 T 2
U
2
) /0 ( 120 T

5
) 000 * 0 000 * 1 ( 2
) 100 * 1 120 (

5
) 000 * 1 2 (
000 * 200

5 100 hours
B2 for time lead
ing manufactur )verage
5
B2 for time
ing order "ait )verage
7
B2 for
time ing manufactur 6rder
5 100 hours 7 /0 hours 5 1/0 hours
1b. )verage "aiting time for an order of B2 and ). if Brandt manufactures both B2 and )..
1
]
1

,
_

,
_

1
1
]
1

,
_

,
_

+
1
1
]
1

,
_

,
_

). for time
ing 3anufactur
). of orders of
number )verage
B2 for time
ing 3anufactur
B2 of orders of
number )verage
capacity
machine )nnual
2
). for time
ing 3anufactur
). of orders of
number )verage
B2 for time
ing 3anufactur
B2 of orders of
number )verage

2

2
5
)U 00 10 ( ) /0 120 ( 000 * 1 T 2
U ) 00 ( 10 T U ) /0 ( 120 T
2 2

+
5
U 000 000 * 0 000 * 1 T 2
)U 000 * 2 10 ( ) 100 * 1 120 T(

+
5
000 2
) 000 * 20 000 * 200 (

+
5
000 * 1
000 * 220
5 220 hours
B2 for time lead
ing manufactur )verage
5
time
ing order "ait )verage
7
B2 for time
ing manufactur 6rder
5 220 hours 7 /0 hours 5 210 hours
). for time lead
ing manufactur )verage
5
time
ing order "ait )verage
7
). for time
ing manufactur 6rder
5 220 hours 7 00 hours 5 220 hours
1&20
2. +he direct approach is to loo! at incremental revenues and incremental costs of
manufacturing and selling )..
8elling price per order for ).*
"hich has average operating throughput time of 220 hours =12*&10
Mariable cost per order &*000
)dditional contribution per order from ). .*&10
3ultiply by e%pected number of orders 10
:ncrease in e%pected contribution from ). =.&*100
$%pected loss in revenues and increase in costs from introducing ).'
P2"5'/$
316
E=1-/$-5 L"## *.
R-9-.'-# %2"0
I./2-(#*.> A9-2(>-
M(.'%(/$'2*.> L-(5
T*0-# %"2 A)) P2"5'/$#
326
E=1-/$-5 I./2-(#- *.
C(22+*.> C"#$# %2"0
I./2-(#*.> A9-2(>-
M(.'%(/$'2*.> L-(5
T*0-# %"2 A)) P2"5'/$#
336
E=1-/$-5 L"## *.
R-9-.'-# P)'#
E=1-/$-5 I./2-(#-# *.
C(22+*.> C"#$# "%
I.$2"5'/*.> A3
346 : 326 F 336
B2
).
+otal
=20*000.00
a
9
=20*000.00
=2*>12.00
b
1*2.2 .00
c
=&*000 .00
=>2*>12.00
1*2.2 .00
=>/*000 .00
a
120 orders (=10*000 =1/*/00)
b
(210 hours 9 1/0 hours) =0.00 120 orders
c
(220 hours 9 0) =0./0 10 orders
:ncrease in e%pected contribution from ). of =.&*100 is less than increase in e%pected costs of
=>/*000 by =//*/00. +herefore* Brandt should not introduce ).( instead* it should sell only B2.
)lternative calculations of incremental revenues and incremental costs of introducing ). follo".
A)$-2.($*9- 1:
I.$2"5'/- A3
316
A)$-2.($*9- 2:
D" N"$
I.$2"5'/- A3
326
R-)-9(.$ R-9-.'-#
(.5 R-)-9(.$ C"#$#
336 : 316 G 326
$%pected revenues
$%pected variable costs
$%pected inventory carrying costs
$%pected total costs
$%pected revenues minus e%pected costs
=1*&2&*100
a
1*./0*000
c
12*>00
e
1*.02*>00
= 021*>00
=1*>20*000
b
1*200*000
d
>*200
f
1*20>*200
= 111*200
=0/*100
&0*000
&*000
&&*000
=(//*/00)
a
(120 =1/*/00) 7 (10 =12*&10)
b
120 =10*000
c
(120 =10*000) 7 (10 =&*000)
d
120 =10*000
e
(120 =0.00 210) 7 (10 =0./0 220)
f
120 =0.00 1/0
1&21
.. 4elays occur in the processing of B2 and ). because of (a) uncertainty about ho" many
orders Brandt "ill actually receive (Brandt e%pects to receive 120 orders of B2 and 10 orders of
).)* and (b) uncertainty about the actual dates "hen Brandt "ill receive the orders. +he
uncertainty (randomness) about the quantity and timing of customer orders means that Brandt
may receive customer orders "hile another order is still being processed. 6rders received "hile
the machine is actually processing another order must "ait in queue for the machine to be free.
)s average capacity utilization of the machine increases* there is less slac! and a greater chance
that a machine "ill be busy "hen another order arrives. 4elays can be reduced if the
uncertainties facing the firm can be reduced* perhaps by negotiating fi%ed schedules "ith
customers in advance. Brandt should e%plore these alternatives before deciding on "hether to
manufacture and sell )..
). may be a strategically important product for Brandt in the future. ?or e%ample* it may
help Brandt to develop a customer relationship "ith )irbus :ndustries that could be helpful in the
future. $ven though manufacturing ). is costly in the short run* it may be beneficial to Brandt in
the long term.
:f Brandt could reduce manufacturing time for ). (and B2)* it could find it profitable to
manufacture both harnesses. Brandt may also "ant to try to negotiate a higher price for ). that
"ould ma!e manufacturing both B2 and ). profitable.
1&22
19-34 (20 min.) T4-"2+ "% /".#$2(*.$#, $42"'>41'$ /".$2*A'$*"., 2-)-9(.$ /"#$#,
1. :t "ill cost #olorado =00 per unit to reduce manufacturing time. But manufacturing is not
a bottlenec! operation( installation is. +herefore* manufacturing more equipment "ill not
increase sales and throughput contribution. #olorado :ndustries should not implement the ne"
manufacturing method.
2. )dditional relevant costs of ne" direct materials* =2*000 .20 units* =1/0*000
:ncrease in throughput contribution* =20*000 20 units* =000*000
+he additional incremental costs e%ceed the benefits from higher throughput contribution by
=1/0*000* so #olorado :ndustries should not implement the ne" design.
)lternatively* compare throughput contribution under each alternative.
#urrent throughput contribution is =20*000 .00 =2*000*000
@ith the modification* throughput contribution is =2.*000 .20 =2*.10*000
+he current throughput contribution is greater than the throughput contribution resulting from
the proposed change in direct materials. +herefore* #olorado :ndustries should not implement
the ne" design.
.. :ncrease in throughput contribution* =20*000 10 units =200*000
:ncrease in relevant costs = 00*000
+he additional throughput contribution e%ceeds incremental costs by =200*000* so #olorado
:ndustries should implement the ne" installation technique.
/. 3otivating installation "or!ers to increase productivity is "orth"hile because
installation is a bottlenec! operation* and any increase in productivity at the bottlenec! "ill
increase throughput contribution. 6n the other hand* motivating "or!ers in the manufacturing
department to increase productivity is not "orth"hile. 3anufacturing is not a bottlenec!
operation* so any increase in output "ill result only in e%tra inventory of equipment. #olorado
:ndustries should encourage manufacturing to produce only as much equipment as the
installation department needs* not to produce as much as it can. Jnder these circumstances* it
"ould not be a good idea to evaluate and compensate manufacturing "or!ers on the basis of
their productivity.
1&2>
19-35 (.09/0 min.) T4-"2+ "% /".#$2(*.$#, $42"'>41'$ /".$2*A'$*"., &'()*$+, 2-)-9(.$ /"#$#,
1. 4irect materials costs to produce .&0*000 tablets* =101*000
4irect materials costs per tablet 5
000 * .&0
000 * 101 =
5 =0./0 per tablet
8elling price per tablet 5 =1.00
Jnit throughput contribution 5 8elling price 9 Jnit direct materials costs
5 =1.00 9 =0./0 5 =0.10 per tablet
+abletma!ing is a bottlenec! operation. +herefore* producing 1&*000 more tablets "ill
generate additional operating income.
5 9
5 =0.10 9 =0.12 5 =0./>
:ncrease in operating income* =0./> 1&*000 5 =&*.10. +herefore* )ardee should accept
the outside contractorOs offer.
2. 6perating costs for the mi%ing department are a fi%ed cost. #ontracting out the mi%ing
activity "ill not reduce mi%ing department costs but "ill cost an additional =0.02 per gram of
mi%ture. 3i%ing more direct materials "ill have no effect on throughput contribution* since
tablet ma!ing is the bottlenec! operation. +herefore* )ardee should reHect the companyOs offer.
.. +he benefit of improved quality is =10*000. )ardee is using the same quantity of direct
materials as before* so it incurs no e%tra direct materials costs. +he 10*000 e%tra tablets produced
generate additional revenue of =10*000 (=1 10*000 tablets) a month. +he modification costs
=2*000 per month* "hich results in a net gain of =.*000. )ardee should implement the ne"
method.
/. #ost per gram of mi%ture 5
000 * 200
000 * 101 =
5 =0.2> per gram
#ost of 10*000 grams of mi%ture 5 =0.2> 10*000 5 =2*>00
Benefit from better mi%ing quality =2*>00 per month
#ost of improving the mi%ing operation =&*000 per month
8ince the costs e%ceed the benefits by =1*200 per month* )ardee should not adopt the
proposed quality improvement plan.
0. #ompare the ans"ers to requirements . and /. +he benefit of improving quality at the
mi%ing operation is the savings in materials costs. +he benefit of improving quality of the tablet
ma!ing department (the bottlenec! operation) is the savings in materials costs plus the additional
throughput contribution from higher sales equal to the total revenues that result from relieving
the bottlenec! constraint.
1&2&
19-36 (.0.0 min.) T4-"2+ "% /".#$2(*.$#, /".$2*A'$*". 0(2>*., #-.#*$*9*$+ (.()+#*#,
1. )ssuming only one type of doll is produced* the ma%imum production in each department
given their resource constraints is'
M")5*.>
D-1(2$0-.$
A##-0A)+
D-1(2$0-.$
C".$2*A'$*". M(2>*.
#hatty #helsey .0*000 lbs
5 20*000
1.0 lbs

>*/00 hours
5 20*200
1I. hours

=.0 W 1.0 D =10 9 1I. D =12
5 =11

+al!ing +anya .0*000 lbs
5 10*000
2lbs

>*/00 hours
5 11*>00
1I2hours

=/0 W 2 D =10 W X D =12
5 =1&
?or both types of dolls* the constraining resource is the availability of material since this
constraint causes the lo"est ma%imum production.
:f only #hatty #helsey is produced* E++ can produce 20*000 dolls "ith a contribution margin of
20*000 D =11 5 =.20*000
:f only +al!ing +anya is produced* E++ can produce 10*000 dolls "ith a contribution margin of
10*000 D =1& 5 =2>0*000.
E++ should produce #hatty #helseys.
2. )s sho"n in ;equirement 1* available material in the 3olding department is the limiting
constraint.
:f E++ sells t"o #hatty #helseys for each +al!ing +anya* then the ma%imum number of +al!ing
+anya dolls the 3olding 4epartment can produce ("here the number of +al!ing +anya dolls is
denoted as +) is'

(+ D 2 lbs.) 7 (T2 D +U D 1.0 lbs.) 5 .0*000 lbs.
2+ 7 .+ 5 .0*000
0+ 5 .0*000
+ 5 1*000
+he 3olding 4epartment can produce 1*000 +al!ing +anya dolls* and 2 D 1*000
(or 12*000) #hatty #helsey dolls.

8ince E++ can only produce 1*000 +al!ing +anyas and 12*000 #hatty #helseys before it runs
out of ingredients* the ma%imum contribution margin (#3) is'
#3 5 12*000 D =11 7 1*000 D =1&
5 =.01*000
1&.0
.. @ith 10 more pounds of materials* E++ "ould produce more dolls. Jsing the same technique
as in ;equirement 2* the increase in production is'
(+ D 2 lbs.) 7 (T2 D +U D 1.0 lbs.) 510 lbs.
2+ 7 .+ 5 10
+ 5 2
E++ "ould produce 2 e%tra +al!ing +anya dolls and / e%tra #hatty #helsey dolls.
#ontribution margin "ould increase by
/ D =11 7 2 D =1& 5 =102
/. @ith 10 more labor hours* production "ould not change. +he limiting constraint is pounds of
material* not labor hours. E++ already has more labor hours available than it needs.
19-37 (20 min.) Q'()*$+ *012"9-0-.$, P(2-$" 5*(>2(0, /('#--(.5--%%-/$ 5*(>2(0,
1. $%amples of failures in accounts receivable management include the follo"ing'
a. uncollectible amounts or bad debts( and
b. delays in receiving payments.
2. ,revention activities that could reduce failures in accounts receivable management
include the follo"ing'
a. credit chec!s on customers by salespersons based on company credit policy(
b. shipping the correct copier to the customer(
c. supporting installation of the copier and ans"ering customer questions(
c. sending the correct invoice* in the correct amount* and to the correct address*
promptly(
d. follo"ing up to see if the machine is functioning smoothly( and
e. offering cash discounts to encourage early payment of receivables.
1&.1
.. ) ,areto diagram for the problem of delays in receiving customer payments follo"s'
SOLUTION EBHIBIT 19-37A
,areto 4iagram for ?ailures in )ccounts ;eceivables at 3urray #orporation
) causeandeffect or fishbone diagram for the problem of delays in sending invoices
may appear as follo"s'
SOLUTION EBHIBIT 19-37B
#auseand$ffect 4iagram
?or ,roblem of 4elays in 8ending :nvoices at 3urray #orporation
1&.2
3ethods and
4esign ?actor
3achinerelated
?actors
3ethods and
#omponents
-e" receivables
cler!
@rong account debited
#omputer error
in invoice
#omputer not "or!ing or
bac!ed up
4elivery documents not
received
3achine improperly
installed
:nvoices not
printed
@rong copier
shipped
100
200
300
400
500
600
700
4elays
in
sending
invoices



:mproper
installation
:nvoice
sent to
incorrect
address
3achine
not
functioning
smoothly
:ncorrect
copier
shipped
#ustomer
in
financial
difficulties
N
'
0
A
-
2

"
%

$
*
0
-
#

1
2
"
A
)
-
0

3
%
(
*
)
'
2
-
6

"
A
#
-
2
9
-
5
T+1- "% 12"A)-0 3%(*)'2-6
Fuman ?actor
19-3 (.09.0 min.) E$4*/# (.5 &'()*$+,
1. 2!!9
;evenues =10*000*000
C"#$# "% Q'()*$+
C"#$
316
P-2/-.$(>-
"% R-9-.'-#
326 : 316 ;
<1!,!!!,!!!
Prevention costs
4esign engineering
Appraisal costs
:nspection of production
,roduct testing
+otal appraisal costs
nternal failure costs
8crap
!"ternal failure costs
@arranty liability
+otal costs of quality
=200*000
&0*000
210*000
.00*000
2.0*000
210*000
=&&0*000
2.0%
..0%
2..%
2 .1 %
& .& %
+he total costs of quality are less than 10% of revenues.
2. 8tudents can probably discuss both sides of this argument. $vans is obviously concerned
because he e%pected the customer complaints calculation to be based on the number of customers
"ho actually complained* not on @illiamsAs survey. Fo"ever* @illiamsAs approach has the
advantage of being thorough and systematic.
Faving done the survey* it "ould be unethical for @illiams to no" modify her analysis
and incorrectly report the costs of quality and various nonfinancial measures of quality. :n
assessing the situation* the specific K8tandards of $thical #onduct for 3anagement )ccountantsL
(described in $%hibit 12) that Eindsey @illiams should consider are listed belo".
Competence
#lear reports using relevant and reliable information should be prepared. ,reparing reports on
the basis of incorrect numbers violates competence standards.
ntegrity
:ntegrity requires that @illiams report the numbers she collected. +he standards of ethical
conduct require the management accountant to communicate favorable as "ell as unfavorable
information. @illiams also has a responsibility to avoid actual or apparent conflicts of interest
and advise all appropriate parties of any potential conflict. :f @illiams revises the customer
complaints numbers* her action could be interpreted as being motivated by her desire to please
her bosses. +his "ould violate the responsibility for integrity.
1&..
Credibility
+he management accountantOs standards of ethical conduct require that information should be
fairly and obHectively communicated and that all relevant information should be disclosed. ?rom
a management accountantOs standpoint* adHusting the customer complaints numbers to ma!e
performance loo! good "ould violate the standard of obHectivity.
@illiams should indicate to ;oche that the costs of quality and nonfinancial measures of
quality presented in the reports are* indeed* appropriate. 8he could propose that she add another
line item indicating the number of unsolicited complaints she received* that is* complaints she
received independent of the survey. 8he should not* ho"ever* change the numbers she obtained
in the survey. :f ;oche still insists on modifying the customer complaints numbers* @illiams
should raise the matter "ith one of ;ocheAs superiors* other than $vans* "ho has a vested
interest in this dispute. :f* after ta!ing all these steps* there is continued pressure to change
survey results* @illiams should consider resigning from the company and not engage in
unethical behavior.
1&./
19-39 (/0900 min.) Q'()*$+ *012"9-0-.$, $4-"2+ "% /".#$2(*.$#,
1. #onsider the incremental revenues and incremental costs to @ellesley #orporation of
purchasing additional grey cloth from outside suppliers.
:ncremental revenues* =1*200 D (0*000 rolls D 0.&0) =0*120*000
:ncremental costs'
#ost of grey cloth* =&00 D 0*000 rolls =/*000*000
4irect materials variable costs at printing
operation* =100 D 0*000 rolls 000*000
:ncremental costs 0*000*000
$%cess of incremental revenues over incremental costs = 120*000
-ote that* because the printing department has surplus capacity equal to 0*000 (10*000 9
&*000) rolls per month* purchasing grey cloth from outside entails zero opportunity costs. Ves*
the ,rinting 4epartment should buy the grey cloth from the outside supplier.
2. By producing a defective roll in the @eaving 4epartment* @ellesley #orporation is
"orse off by the entire amount of revenue forgone of =1*200 per roll. -ote that* since the
"eaving operation is a constraint* any rolls received by the ,rinting 4epartment that are
defective and disposed of at zero net disposal value result in lost revenue to the firm.
)n alternative approach to analyzing the problem is to focus on the costs of defective
units and the benefits of reducing defective units.
+he relevant costs of defective units in the ,rinting 4epartment are'
a. 4irect materials variable costs in the @eaving 4epartment = 000
b. 4irect materials variable costs in the ,rinting 4epartment 100
c. #ontribution margin forgone from not selling one roll
=1*200 9 =000 9 =100 100
)mount by "hich @ellesley #orporation is "orse off as a
result of a defective unit in the ,rinting 4epartment =1*200
-ote that only the variable costs of defective units of =100 per roll (direct materials in the
@eaving 4epartment* =000 per roll' direct materials in the ,rinting 4epartment* =100 per roll)
are relevant because improving quality "ill save these costs. ?i%ed costs of producing defective
units* attributable to other operating costs* are irrelevant because these costs "ill be incurred
"hether @ellesley #orporation reduces defective units in the ,rinting 4epartment or not.
@ellesley #orporation should ma!e the proposed modifications in the ,rinting
4epartment because the incremental benefits e%ceed the incremental costs by =120*000 per
month'
:ncremental benefits of reducing defective units in the ,rinting 4epartment
by /% (from 10% to 1%)
/% D &*000 rolls D =1*200 per roll (computed above) =/20*000
:ncremental costs of the modification .00*000
1&.0
$%cess of incremental benefits over incremental costs =120*000
1&.1
.. +o determine ho" much @ellesley #orporation is "orse off by producing a defective roll
in the @eaving 4epartment* consider the payoff to @ellesley from not having a defective roll
produced in the @eaving 4epartment. +he good roll produced in the @eaving 4epartment "ill
be sent for further processing in the ,rinting 4epartment. +he relevant costs and benefits of
printing and selling this roll follo"'
)dditional direct materials variable costs incurred in the
,rinting 4epartment = (100)
$%pected revenue from selling the finished product* =1*200
D 0.& (since 10% of the ,rinting 4epartment output "ill
be defective and "ill earn zero revenue) 1*120
-et e%pected benefit of producing a good roll in the
@eaving 4epartment =1*020
By producing a defective roll in the @eaving 4epartment* @ellesley #orporation is "orse off by
=1*020 per roll. -ote that* since the "eaving operation is a constraint* any rolls that are defective
"ill result in lost revenue to the firm.
)n alternative approach to analyzing the problem is to focus on the costs and benefits of
reducing defective units.
+he relevant costs of defective units in the @eaving 4epartment are'
a. 4irect materials variable costs in the @eaving 4epartment = 000
b. $%pected unit contribution margin forgone from
not selling one roll* (=1*200 D 0.&) 9 =000 9 =100 020
)mount by "hich @ellesley #orporation is "orse off as a result
of producing a defective unit in the @eaving 4epartment =1*020
-ote that only the variable scrap costs of =000 per roll (direct materials in the @eaving
4epartment) are relevant because improving quality "ill save these costs. )ll fi%ed costs of
producing defective units attributable to other operating costs are irrelevant because these costs
"ill be incurred "hether @ellesley #orporation reduces defective units in the @eaving
4epartment or not.
@ellesley #orporation should ma!e the improvements proposed by the design
engineering team because the incremental benefits e%ceed the incremental costs by =.0*000 per
month'
:ncremental benefits of reducing defective units in the @eaving 4epartment
by 2% (from 0% to .%)
2% D 10*000 rolls D =1*020 per roll (computed above) =200*000
:ncremental costs of improvements 120*000
$%cess of incremental benefits over incremental costs = .0*000
1&.2