Chapter: Balanced Scorecard: Quality and Time

1) Ply Corp manufactures doors. Classify each of the following quality costs as prevention costs, appraisal
costs, internal failure costs, or external failure costs.

a. Retesting of reworked products

b. Downtime due to quality problems
c. Analysis of the cause of defects in production
d. Depreciation of test equipment
e. Warranty repairs
f. Lost sales arising from a reputation for poor quality
g. Quality circles
h. Rework direct manufacturing labor and overhead
i. Net cost of spoilage
j. Technical support provided to suppliers
k. Audits of the effectiveness of the quality system
l. Plant utilities in the inspection area
m. Reentering data because of keypunch errors

2) Komerica Corp is committed to its quality program. It works with all areas of the company to establish
sound quality programs within reasonable budget guidelines. For 2022, it has budgeted $1,000,000 for
prevention costs and $900,000 for appraisal costs. Internal failure has a budget of $100 per failed item,
while external failure has a total budget of $600,000.

Product Testing has proposed to management a change in the 2022 budget for a new method of testing
products. If management decides to implement the new method, $1.50 per unit of appraisal costs will be
saved, up to a level of 150,000 tests. No additional savings are expected past the 150,000 level. The new
method involves $95,000 in training costs and $65,000 in yearly testing supplies.

Traditionally, 5% of all completed items have to be reworked. External failure costs average $120 per
failed unit. The company's average external failures are 1% of units sold. The company carries no ending
inventories.

Required:
a. What is the adjusted budget for appraisal costs, assuming the new method is implemented and
800,000 units are tested during the manufacturing process in 2021?

b. How much do internal failure costs change, assuming 500,000 units are tested under the new method
and it reduces the amount of unacceptable units in the manufacturing process by 40%?

c. What would be the change in the external failure budget, assuming external failures are reduced by
60% and the same facts as in part (b)?
3) Norton's Convenience store has a variable demand. The daily demand ranges from 270 to 330
customers a day who average purchasing 5 items each. The average daily demand is 300 customers. The
convenience store currently operates 12 hours a day. Each order takes approximately 2 minutes.

Required:
a. What is the average customer waiting time, in minutes?

b. What is the cycle time for an order?

c. Norton has decided that the waiting time is too long and has increased the hours the store is open to
15 hours. What is the waiting time now?

4) 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 is the expected monthly margin without scooters if the company sells all 92 cycles it
manufactures?
d. 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.
e. What action do you recommend?
5) Brix, Inc., prepares frozen food for fast-food restaurants. It has two workstations, cooking and
assembly. The cooking station is limited by the cooking time of the food. Assembly is limited by the
speed of the workers. Assembly normally waits on food from cooking. Because the demand has increased
in recent months to 2,800 dozen units, management is considering adding another cooking station or else
having the cooks start to work earlier. The monthly cost of operating the cooking station one more hour
each day is $2,400. The cost of adding another cooking station would add an average of $10 per hour. The
current operating hours total eight hours a day, 22 days a month. The contribution margin of the finished
products is currently $8 per dozen. Inventory carrying costs average $2.00 per dozen per month. Either
the extra hour or the new cooking station would increase production by 20 dozen a day, with a long-run
increase of 80 dozen units in finished goods inventory to 280 dozen.

Required:
a. What is the total production per month if the change is made?

b. What is the increase in the expected monthly product contribution for each of the possible changes?
Assume long-run production equals sales.

6) KidsTravel produces car seats for children from newborn to 2 years old. KidsTravel’s only problem
with its car seats was stitching in the straps. The problem can usually be detected and repaired during an
internal inspection. Inspection costs $4.00 per car seat, and repair costs $1.50 per car seat. All 100,000 car
seats were inspected last year, and 10% were found to have problems with the stitching. Another 2% of
the 100,000 car seats had problems with the stitching, but the internal inspection did not discover them.
Defective units that were sold and shipped to customers are shipped back to KidsTravel and repaired.
Shipping costs are $10.00 per car seal, and repair costs are $1.50 per car seat. Negative publicity will result
in a loss of future contribution margin of $90 for each external failure.

Required:

1. Identify total COQ by category (appraisal, internal failure, external failure).

2. KidsTravel is concerned with the high up-front cost of inspecting all 100,000 units. It is considering an
alternative internal inspection plan that will cost only $2.50 per car seat inspected. During the internal
inspection, the alternative technique will detect only 7% of the 100,000 car seats that have stitching
problems. The other 5% will be detected after the car seats are sold and shipped. What are the total
COQ for the alternative technique?

3. What factors other than cost should KidsTravel consider before changing inspection techniques?