Managing for Quality Essay Questions

“What I try to do is go out and grab lightning every day.” That’s the way Terry Fadem of DuPont describes the
company’s never-ending search for tomorrow’s breakthroughs. “A leader’s job is less about getting through
the current storm and more about enabling people to navigate the ongoing series of storms,” says a Mellon
Bank executive. Explain five ways to deal with change and innovation that these two people might generally
use.
Some ways to deal with change and innovation include
(1) allow room for failure
(2) give one consistent explanation for the change
(3) look for opportunities in unconventional way
(4) have the courage to follow your idea
(5) allow grieving over the loss of the old ways, then move on.

Describe the two types of change. Contrast how managers act in each type. Which type of change is better?
The two types of change are proactive and reactive. In proactive change, managers anticipate and plan for
change, based on anticipating possible or expected problems or opportunities. In reactive change,
managers make changes in response to problems or opportunities as they arise. Proactive change is better,
as usually reactive change takes longer, and serious mistakes can be made.

What is activity-based costing?

It is the method to spread the cost of a project by multiple departments. Activity-Based Costing (ABC) is a method of
allocating costs to products and services. It is generally used as a tool for planning and control. It was developed as
an approach to address problems associated with traditional cost management systems that tend to have the inability
to accurately determine actual production and service costs, or provide useful information for operating decisions.
With these deficiencies managers can be exposed to making decisions based on inaccurate data. The higher exposure
is for companies with multiple products or services.
What are three of the five stages of a project life cycle as defined by Kloppenburg and Petrick?
1) Project Quality Initiation
2) Project Quality Planning
3) Project Quality Assurance
4) Project Quality Control
5) Project Quality Closure

What are three of the five purposes of a performance measurement system?

1) Providing a perspective of the past, present, and future
2) Identifying trends and progress
3) Facilitating understanding of cause-and-effect relationships
4) Providing direction and support for continuous improvement
5) Allowing performance comparison to benchmarks

What three observations were made by Osborne and Gaebler concerning data?
If you can't measure results, you can't tell success from failure. If you can't see success, you can't reward it, and if you
can't reward success you are probably rewarding failure. If you can't recognize failure, you can't correct it.

What are three of the five activities that a total approach to product and process design involves?
1) Constantly thinking in terms of how one can design or manufacture products better, not just solving or
preventing problems.
2) Focusing on "things done right" rather than things gone wrong.
3) Defining customer expectations and going beyond them, not just meeting them or just matching the
competition.
4) Optimizing desirable feature or results, not just incorporating them.
5) Minimizing the overall cost without compromising quality of function.
 What are three of the four reasons why "process improvement" is an important business strategy?
1) Finance
2) Customers
3) Operations
4) People
• Customer loyalty is driven by delivered value.
• Delivered value is created by business processes.
• Sustained success in competitive markets requires a business to continuously improve delivered value.
• To continuously improve value-creation ability, a business must continuously improve its value-creation
processes.

Discuss the four areas in which change in organizations is most often needed. Choose an organization, real or
hypothetical, and give examples of each.
The four areas are:
1. People (perceptions, attitudes, performance, skills)
2. Technology (any process used in changing materials into a finished product)
3. Structure
4. Strategy

The aligned approach of the Baldrige Award is designed to achieve what results in what three areas?
It is called the Criteria for Performance Excellence, designed to encourage companies to enhance their
competitiveness through an aligned approach to organizational performance management that result in the
following: 1. Delivery of ever-improving value to customers, resulting in improved market place success. 2.
Improvement of overall company performance and capabilities 3. Organizational and personal learning

Describe what OD is and what it can be used for.

OD is a set of techniques for implementing planned change to make people and organizations more effective.
It aims for fundamental change that is process-oriented and is based in humanistic values. OD can be used
to address a variety of problems in organizations, including managing conflict, revitalizing an organization,
and adapting to mergers.

Explain how the OD process works. Suppose you were a student member of your college's or university's
committee that was attempting to study why an excessive number of students drop out of your college; give
examples of activities your task force might take in each stage of its OD process.
The three steps in the OD process are diagnosis, intervention, and evaluation. Examples of diagnostic
actions might be generating a survey of students or interviewing students who dropped out. Examples of
interventions might be changes to the advising process or changing the first-year student orientation.
Examples of evaluation would be comparing dropouts from before and after the intervention.

Under what circumstances is OD most likely to be successful?

Multiple interventions: Combined interventions such as goal setting, feedback, training, etc. have been
found to work better than single interventions.
Management support: OD is more likely to succeed when top managers give the OD program their support
and are truly committed to the change process and the desired goals of the change program. Also, the
expectations for change were not unrealistic.
Goals geared to both short- and long-term results: Change programs are more successful when they are
oriented toward achieving both short-term and long-term results. Managers should not engage in
organizational change for the sake of change. Change efforts should produce positive results.
 OD is affected by culture: OD effectiveness is affected by cross-cultural considerations. Thus, an OD
intervention that worked in one country should not be blindly applied to a similar situation in another
country.

Describe the types of innovation. Give an example of each.

• A product innovation is a change in the appearance or the performance of a product or a service or the
creation of a new one.
• A process innovation is a change in the way a product or service is conceived, manufactured, or
disseminated.
• Incremental innovations are the creation of products, services, or technologies that modify existing ones.
Radical innovations are the creation of products, services, or technologies that replace existing ones.

What are the characteristics of innovation, according to Rosabeth Kanter? What implications should managers
draw from these characteristics?
The characteristics are:
Innovation is uncertain. Managers should be tolerant of ambiguity.
The people closest to the innovation know the most about it, at least initially. Managers should realize that
outsiders, perhaps including themselves, may find the innovation difficult to understand and appreciate.
Innovation may be controversial. Resources (time, attention, money) used for any one innovation potentially
take away from others uses of those resources. Thus, managers should realize that a competition for
resources may result.
Innovation can be complex because it may cross organizational boundaries. This occurs when an innovation
involves more than one organizational department or business unit. A manager needs to manage these
relationships to make the innovation a success.

What should organizations do to provide support for innovations?

Innovation doesn’t happen as a matter of course. Organizations have to develop ways to make it happen—
over and over. Three ways to do so are by providing
(1) the right organizational culture,
(2) the appropriate resources, and
(3) the correct reward system.

Describe Lewin's Change Model. Suppose your college or university wanted to make a major change in some
important aspect of student life at your school. How should the college or university use Lewin's model to
guide their actions?
The following stages of change and then give an example of how his or her university would implement each
of these change stages.
Lewin's Change Model describes three stages of managing change efforts:
Unfreezing – creating the motivation to change;
Changing – learning new ways of doing things;
Refreezing – making the new ways normal.

Describe Kotter's steps for leading organizational change. Suppose your university wanted to make a major
change in some important aspect of the administrators' behavior at your school (for example, making staff in
the registrar's office more responsive). How should the university use Kotter's model to guide their actions?
The following stages of change and then give an example of how his or her university would implement each
of these change stages.
Kotter's eight steps are:
1. Establish a sense of urgency
2. Create the guiding coalition
 3. Develop a vision and strategy
4. Communicate the change vision
5. Empower broad-based action
6. Generate short-term wins
7. Consolidate gains and product more change
8. Anchor new approaches in the culture.

Improved quality of conformance results in what?

Improved quality of design and conformance results in increased profits. Improved conformance in
production or service delivery leads to lower costs achieved through savings in rework, scrap, resolution of
errors, and warranty expenses, which ultimately causes an organization to be more profitable. (Lower
manufacturing and service cost, and thus higher profitability.)

What the four parts of Deming's Profound Knowledge system?

The four parts to Deming's Profound Knowledge System are
1. Appreciation for a system
2. Understanding variation
3. Theory of knowledge
4. Psychology

Deming’s Profound Knowledge consists of four elements. Answer the following three parts relating to the
“psychology” element of Deming’s Profound Knowledge. Your discussion should relate to this element of
Deming's Profound Knowledge and not to psychology in general.
1. Discuss why psychology is important for us to understand.
2. Discuss how fear plays a part in this element.
3. Discuss how pay and motivation are of interest in this element
1. Deming's higher levels of quality lead to higher levels of productivity approach set a new standard in the
business world, and take the focus away from the higher costs the lower productivity situation that many who
do not incorporate his philosophy tend to deal with. His psychology is so important because it helps us
understand people, interaction between people and circumstances, interactions between leaders and
employees, and any system of management. People differ from one another and a true Leader must be aware
of this and utilize people at their perspective levels and optimize their abilities.
2. Fear plays a part in this element because of fear of reprisal, fear of failure, fear of the unknown, fear of
relinquishing control and fear of change. Workers are often afraid to report quality problems because they
might not meet their quotas, their incentive pay might be reduced, or they may be blamed for the problems in
the system. Managers also are afraid to cooperate with other departments because the other managers might
receive higher performance ratings and bonuses or they fear takeovers or reorganizations. Fear encourages
short-term thinking. The fear of loss of power affects many Managers. Fear is a cultural issue for all
organizations and can be overcome with transition of leadership and corporate policies.
3. Pay and motivation are covered in this element because Deming believed that pay is not a motivator, the
enjoyment of people's work is the motivator that is required to reach the companies goals successfully. Pride
in ones work is the best motivator of all and promotes quality work. Deming believed that one of the biggest
barriers to pride in workmanship is performance appraisals. They destroy teamwork by promoting
competition for limited resources, focus on the short term and discourage risk taking, always go towards
what the boss wants rather than quality, and confounds the people resources with other resources.

TQM is based on three fundamental principles. Although simplistic, TQM management practices are
different than they are in non-TQM operations. Briefly describe how the two sets of management practices
differ.
Total quality is based on following three fundamental principles:
 1. A focus on customers and stakeholders
2. Employee engagement and teamwork by everyone in the organization
3. A process focus supported by continuous improvement and learning
In traditional management practices, organizations did little to understand external customer requirements
and never paid attention to the needs of internal customers. Managers and specialists controlled and
directed production systems; workers were told what to do and how to do it, and rarely were asked for their
input. Employee engagement and teamwork were virtually nonexistent. A certain amount of waste and error
was tolerable and was controlled by postproduction inspection. Improvements in quality generally resulted
from technological breakthroughs instead of a relentless mindset of continuous improvement. In contrast to
that an organization following a TQM program, actively seeks to identify customer needs and expectations,
to build quality into work processes by tapping the knowledge and experience of its workforce, and to
continually improve every facet of the organization.

How is employee empathy used to improve the service systems of some of the best customer-focused
companies?
Service employees have the most contact with customers, but in may service companies they receive the
lowest pay, minimal training, little decision-making authority, and little responsibility, but the best customer
focused companies realized very quickly that in order to keep the customers happy and satisfied they should
first keep their own employees happy and satisfied. They understood that employees must know what it feels
like to be a customer and “Researchers have repeatedly demonstrated that when service employee job
satisfaction is high, customer satisfaction is high, and that when job satisfaction is low, customer satisfaction
is low”. Customer focused companies empower their employees and encourage them to be innovative and to
make decisions that advance quality and customer satisfaction goals. They have effective reward systems
that recognize employee performance which motivate them to do better in the future. Employees are provided
excellent on the job training ensuring that they are absolutely ready before facing the actual customers and
they also have a program where the effectiveness of the training is measured and monitored. Companies also
conduct refresher training for the employees.

Why is information technology an essential component of the service system?

Information technology is essential for quality in modern service organizations because of the high volumes
of information they must process and because customers demand service at ever-increasing speeds.
Information technology incorporates computing, communication, data processing, and various other means
of converting data into useful information. The information can be used by the service organizations to
better serve the customers in the future and make it easier for the customers to do business with the
organization.

A TQM purchasing agent should be concerned with what two major aspects of the materials they purchase?
A TQM purchasing agent should not simply be responsible for low-cost procurement of goods and
materials, but should maintain a clear focus on the quality of purchased goods and materials. (The cost and
quality of supplies and materials.)

1. What are the activities generally performed by strategic leaders?

Activities that strategic leaders perform generally include creating and communicating a vision of the future,
sustaining an effective organization culture, making strategic decisions, developing key competencies and
responsibilities, managing multiple constituencies, selecting and developing the next generation of leaders,
and infusing ethical value systems into an organization’s culture.
Effective strategic leaders also have the capability to create and maintain absorptive capacity and adaptive
capacity in order to deal with increasingly hyper-turbulent environments.

2. Describe the three levels of strategic leadership.

Strategic leadership can be viewed from three levels, similar to the three levels of quality. Senior leaders are
involved in vision and strategy formulation, mid-level leaders develop executable action plans and projects
that best use an organization’s resources, and supervisory leaders ensure that these action plans are
deployed throughout the organization so that essential tasks and projects may be accomplished in support of
the strategic vision.

3. What is the relevance of the Baldrige Organizational Profile?

The Organizational Profile provides a frame of reference to help an organization better understand the
internal and external factors that shape its operating environment, the key requirements for current and
future business success, and organizational sustainability; and the needs, opportunities, and constraints
placed on the organization’s performance management system. The Organizational Profile provides the “big
picture” of the organization and sets the context for good strategic decisions.

4. Describe the Baldrige Organizational Profile.

The Baldrige Criteria provides a list of key questions called the Organizational Profile, which addresses the
basic characteristics of the organization, organizational relationships, the competitive environment, the
advantages an organization has and the challenges that it faces, and its approach to performance
improvement.

The first set of questions, under the heading “Organizational Environment,” help to provide a clear
understanding of the essence of the organization, why it exists, and where senior leaders want to take the
organization in the future. The second group of questions, listed under “Organizational Relationships,”
addresses the organizational structure, governance system, differences among customer and stakeholder
groups, and supplier and partnering relationships.

5. Explain the importance of a mission statement.

The mission, vision, and guiding principles serve as the foundation for strategic planning. A mission
statement might include a definition of products and services the organization provides, technologies used to
provide these products and services, types of markets, important customer needs, and distinctive
competencies or the expertise that sets the firm apart from others.

A firm’s mission guides the development of strategies by different groups within the firm. It establishes the
context within which daily operating decisions are made and sets limits on available strategic options. In
addition, it governs the trade-offs among the various performance measures and between short- and long-
term goals. Finally, it can inspire employees to focus their efforts toward the overall purpose of the
organization.

6. Explain the challenges for top management in implementing the vision, mission, and guiding
principles.
The mission, vision, and guiding principles serve as the foundation for strategic planning. Top management
and others who lead, especially the CEO, must articulate them. They also have to be transmitted, practiced,
and reinforced through symbolic and real action before they become “real” to the employees and the people,
groups, and organizations in the external environment that do business with the firm.

Most organizations have a very diverse workforce from the perspective of job descriptions and
responsibilities. Some groups may be unionized and others not. Each of these groups may differ in terms of
their requirements for training and safety, compensation and rewards, and motivation. Similarly, the mix of
facilities, technologies, and equipment used in operations may limit strategic choices and affect how key
processes are managed. Finally, the regulatory environment in which an organization operates places
specific requirements on the organization.
7. Describe the basic strategy development model illustrated in the text.
This model begins with gathering critical information about the organization and its environment,
developing a strategy, translating that strategy into specific action plans or projects, and reviewing
performance for improvement opportunities.

In some organizations, strategic planning might involve participation by key suppliers, distributors,
partners, and customers.

8. Explain the need for an environmental assessment and describe its features.
Although an organization’s mission, vision, and values rarely change, the environment in which the
organization exists usually does. Thus, strategy development requires an environmental assessment of key
factors which typically include:
The organization’s strengths, weaknesses, opportunities, and threats (SWOT)
Early indications of major shifts in technology, markets, customer preferences, competition, or the
regulatory environment are: long-term organizational sustainability, the ability to execute the strategic plan

9. What is the purpose of a SWOT analysis in strategy development?

A SWOT analysis should address all factors that are key to an organization’s future success, and might
include customer and market needs, expectations, and opportunities.
All this information is usually analyzed using various types of forecasts, projections, options, scenarios, or
other approaches. Strategic planning teams use the results of these analyses to develop strategies,
objectives, and action plans that address strategic challenges and opportunities and balance the needs of all
stakeholders.

10. Why are action plans important in strategy deployment?

Action plan development represents the critical stage in planning when strategic objectives and goals are
made specific so that effective, organization-wide understanding and deployment are possible. Action plans
typically include details of resource commitments and time horizons for their accomplishment. Action plans
could entail designing efficient processes and creating an accounting system that tracks activity-level costs,
aligned for the organization as a whole.

11. What could be the reason(s) for poor strategy deployment?

Poor deployment often results from one of three reasons:
Lack of alignment across the organization - Good deployment aligns resources and policies.
Misallocation of resources - Good strategic planning dedicates resources to making improvements or
changes in those areas that are critical to an organization’s strategic advantage.
Insufficient operational measures - Organizations need appropriate measurement systems at the operational
level to track progress and know if action plans are really accomplishing their objectives.

12. What is hoshin kanri?

The traditional approach to deploying strategy has been top-down. However, taking a total quality
perspective, subordinates are both customers and suppliers, and therefore their input and involvement is
necessary. An iterative process in which senior management asks what lower levels of the organization can
do, what they need, and what conflicts may arise can avoid many of the implementation problems that
managers typically face.
Japanese firms introduced a deployment process known as hoshin kanri, or hoshin planning. In the United
States, this process is often referred to as policy deployment or management by planning. The literal
Japanese translation of hoshin kanri is “pointing direction.” The idea is to point, or aligns, the entire
organization in a common direction.
13. Explain the roles of top management and middle management in the deployment process.
With policy deployment, top management is responsible for developing and communicating a vision, then
building organization-wide commitment to its achievement. Middle management negotiates with senior
management regarding the objectives that will achieve the strategies, and what process changes and
resources might be required to achieve those objectives. Middle management then negotiates with the
implementation teams the final short-term objectives and the performance measures that are used to indicate
progress toward accomplishing the objectives.
Management reviews at specific checkpoints ensure the effectiveness of individual elements of the strategy.
Management may modify objectives on the basis of these reviews. Top management evaluates results as well
as the deployment process itself through annual reviews, which serve as a basis for the next planning cycle.

14. What is catchball? Describe.

The negotiation process in strategy deployment is called catchball. Leaders communicate midterm objectives
and measures to middle managers who develop short-term objectives and recommend necessary resources,
targets, and roles/responsibilities. These issues are discussed and debated until agreement is reached. The
objectives then cascade to lower levels of the organization where short-term plans are developed. Catchball
is an up, down, and sideways communication process as opposed to an autocratic, top-down management
style.
The process focuses on optimizing the system rather than on individual goals and objectives. This process
can only occur in a culture that nourishes open communication.

15. What are the Seven Management and Planning Tools?

Managers may use a variety of tools and techniques, known as the Seven Management and Planning Tools,
to implement policy deployment. The Seven Management and Planning Tools had their roots in post–World
War II operations research developments in the United States, but were combined and refined by several
Japanese companies over the past several decades as part of their planning processes. They were
popularized in the United States by the consulting firm GOAL/QPC, and have been used by a number of
firms since 1984 to improve their quality planning and improvement efforts.
These tools are particularly useful in structuring unstructured ideas, making strategic plans, and organizing
and controlling large, complex projects. They are:
• Affinity diagram
• Interrelationship diagraph
• Tree diagram
• Matrix diagram
• Matrix data analysis
• Process decision program chart
• Arrow diagrams

16. What are the factors that affect how work is organized in the context of an organization?
Several factors having to do with the context of the organization affect how work is organized. They include
the following:
• Operational and organizational guidelines
• Management style
• Customer influences
• Size
• Diversity and complexity of product line
• Stability of the product line
• Financial stability
• Availability of personnel
17. Describe the basic types of organizations.
Although many different organizational structures exist, most are variations or combinations of three basic
types:
(1) the line organization,
(2) the line and staff organization, and
(3) the matrix organization.
The line organization is a functional form, with departments that are responsible for marketing, finance, and
operations. The line and staff organization is the most prevalent type of structure for medium-sized to large
firms. In such organizations, line departments carry out the functions of marketing, finance, and production
for the organization and staff personnel assist the line managers in carrying out their jobs by providing
technical assistance and advice.
The matrix-type organization was developed for use in situations where large, complex projects are designed
and carried out, such as defense weapons systems or large construction projects.

18. What are work systems?

The term “work systems” refers to how the work of an organization is accomplished. Work systems
coordinate the internal work processes and the external resources necessary to develop, produce, and deliver
products and services to customers and to succeed in marketplace.

Work systems involve the workforce, key suppliers and partners, contractors, collaborators, and other
components of the supply chain needed to produce and deliver products, services, and business and support
processes.

19. What are core competencies? Describe its characteristics.

Core competencies refer to an organization’s areas of greatest expertise that provide a sustainable
competitive advantage in the marketplace or service environment. Gary Hamel and C.K. Prahalad suggested
that a core competency meets three conditions:
It contributes significantly to customer benefits.
It provides access to many products and markets.
It is difficult for competitors to imitate.

20. What are the different views on core competencies?

Some contemporary theories suggest that business activities that do not comprise an organization’s core
competency should be outsourced. Outsourcing refers to the practice of transferring the operations of a
business function to an outside supplier. The opposite of outsourcing is vertical integration, by which certain
business functions are acquired and consolidated within a firm. For example, a firm may purchase a key
supplier to strengthen its value chain.

3. What are two of Deming's 14 points?

Create and publish to all employees a statement of the aims and purposes of the company or other
organization. The management must demonstrate constantly their commitment to this statement.
Learn the new philosophy, top management and everybody.
Understand the purpose of inspection

4. How does a company become ISO 9000 certified?

The company looking to get ISO 9000 certified should develop a quality policy manual which incorporates
all the elements of ISO 9000 standards including the quality management principles. It should fulfill the
requirements of the ISO standards which include the following Management Responsibility: It addresses
what top management must do to ensure an effective quality system, such as promoting the importance of
quality throughout the organization, developing and implementing the quality management system,
identifying and meeting customer requirements, defining an organizational quality policy and quality
objectives, clearly defining responsibilities for quality, and controlling documents and records. Resource
Management: which ensures that an organization provides sufficient people, facilities, and training
resources? Product Realization: refers to controlling the production/service process from receipt of an order
or quote through design, materials procurement, manufacturing or service delivery, distribution, and
subsequent field service. Measurement, Analysis, and Improvement focuses on control procedures for
assuring quality in products and processes, analysis of quality-related data, and correction, prevention, and
improvement planning activities. The company should develop procedures for every single operation and
process in the organization. Company should train all its employees on ISO 9000 process and select key
personnel to be the internal auditors. The task of the auditors is to review the quality manual for compliance
with ISO 9000 regulations. If the audit finds any issues, corrective action is suggested and implemented.
Once the company passes the internal audit, it can select a third party auditor like laboratory or some other
accreditation agency (called a registrar) for getting certified. References Evans, James R. Managing for
Quality and Performance Excellence, 8th Edition. South Western Educational Publishing

5. What categories are available under the Deming Prize?

The following three categories are available under the Deming prize The Deming Prize for Individuals – It is
given to those who have made outstanding contributions to the study of TQM or statistical methods used for
TQM, or those who have made outstanding contributions in the dissemination of TQM. The Deming
Application Prize – It is given to organizations or divisions of organizations that have achieved distinctive
performance improvement through the application of TQM in a designated year. The Quality Control Award
for Operations Business Units – It is given to operations business units of an organization that have
achieved distinctive performance improvement through the application of quality control/management in the
pursuit of TQM in a designated year according to Union of Japanese Scientists and Engineers (JUSE)
References Evans, James R.. Managing for Quality and Performance Excellence, 8th Edition.

6. Deming's Point 4 is: Stop making decisions purely on the basis of cost. What does this point mean?
As per this point, purchasing department of a company or a business should not make purchasing decision
like buying of raw materials or other supplies going into the manufacturing of a product based on price
alone, but should also consider the quality of the product. As per Deming the direct costs associated with
poor quality raw materials that arise during production or during warranty periods, as well as the loss of
customer goodwill, can far exceed the cost “savings” perceived by purchasing. Thus, purchasing must
understand its role as a supplier to production and its impact on the system. The point also drives home
another aspect which Deming strongly promoted was that businesses should establish long-term
relationships with fewer suppliers, which leads to loyalty and opportunities for mutual improvement and not
follow the traditional management system of having multiple suppliers for the same raw materials. Another
problem with constantly changing suppliers solely on the basis of price increases is the variation in the
material supplied to production, because each supplier’s process is different. In contrast, a reduced supply
base decreases the variation coming into the process, thus reducing scrap, rework, and the need for
adjustment to accommodate this variation. A long-term relationship strengthens the supplier–customer bond,
allows the supplier to produce in greater quantity, improves communication with the customer, and therefore
enhances opportunities for process improvement. The emphasis on supply chain management (SCM) today
reflects the achievement of Point 4. SCM focuses heavily on a system’s view of the supply chain with the
objective of minimizing total supply chain costs and developing stronger partnerships with suppliers.
References Evans, James R, Managing for Quality and Performance Excellence, 8th Edition, South Western
Educational Publishing

7. What are Feigenbaum's three steps to quality?

 1) Quality Leadership: A continuous management emphasis is grounded on sound planning rather than
reaction to failures. Management must maintain a constant focus and lead the quality effort.
2) Modern Quality Technology: The traditional quality department cannot resolve 80 to 90 percent of
quality problems. This task requires the integration of office staff as well as engineers and shop-floor
workers in the process who continually evaluate and implement new techniques to satisfy customers
in the future.
3) Organizational Commitment: Continuous training and motivation of the entire workforce as well as
an integration of quality in business planning indicate the importance of quality and provide the
means for including it in all aspects of the firm's activities.

8. What are four of the seven categories addressed in the Baldrige Award?
• Leadership
• Strategic Planning
• Customer focus
• Measurement
• Analysis, and
• Knowledge Management

Deming's Profound Knowledge consists of four elements. Answer the following three parts relating to the
"variation" element of Deming's Profound Knowledge. Your discussion should relate to this element of
Deming's Profound Knowledge and not to variation in general.
1. Describe how a quincunx can be used to explain variation.
2. Why is understanding variation important, and what do we need to do about it?
3. What tools do we need to use to understand variation, and why is using these tools important to our
decision-making process?
1. A quincunx is device which can be used to show the natural process of variation. To illustrate or see the
variation the following procedure should be followed. Place a large numbers of pins randomly inside this
device and drop small balls through the holes provided at the top of the device. As the balls are being
dropped it hits the pins placed inside the box which causes the balls to move either to the right or left before
falling in the collection boxes placed at the bottom. Once all the balls are dropped and collected in the box,
it can be noticed that most of the balls (not all) end up in the middle of the box and the balls in the box form
a bell shaped distribution, which means that even though the ball were dropped from the same position, all
of them didn't end up in the same place, which demonstrates variation which occurred due to the presence of
pins inside the device.
2. Products and parts are manufactured by humans and machinery. No two products or parts will be exactly
the same dimension wise; there will be a very minor variation between the two identical parts. As seen in the
quincunx demonstration where the pins caused the ball to fall in different places, similarly equipment
performance, human behavior or "factors inherent in the design of the system, which cannot easily be
controlled" (Evans, James R, p.95) can cause variation. Excessive variation hampers the quality of the
product, results in rework, product failures and recall, customers’ complaints, dissatisfied customers and
increased costs, therefore understanding variation is very important. In order to control variation managers,
supervisors and shop floor employees should first understand and know the reason for the variance and then
work to reduce the same by using modern technology, better process design and training. The organization
should periodically make changes to their and obtain feedback from the customers too. The reduced
variation will result in less scrap and rework. It will also improve the productivity, efficiency and customer
satisfaction.
3. Statistical methods like control charts, confidence intervals or prediction intervals can be used to
understand variation. These tools will help the management understand the causes of variation and the
range of variation. It will also help them to understand whether the variation is human, equipment or
process related or whether it is happening in any particular shift or time of the day. The information
collected with the help of these tools will help the management know the reason behind the variation and
design corrective actions to reduce or eliminate the variation References Evans, James R. Managing for
Quality and Performance Excellence, 8th Edition. South Western Educational Publishing, 01/2010. p. 95.
(Evans, James R. Managing for Quality and Performance Excellence, 8th Edition. South Western
Educational Publishing, 01/2010. p. 95). <vbk:1111509360#outline(3.3.1)>

2. Answer the following three parts relating to the situational leadership theory:
Discuss the leadership style that would be used if the maturity level of the follower was able and willing.
Discuss the leadership style that would be used if the maturity level of the follower was unable but willing.
Discuss the leadership style that would be used if the maturity level of the follower was able but unwilling.
1. Able and Willing: In this scenario the followers are more than capable of working by themselves. They are
willing, motivated and confident. The leader in this situation acts as a delegator. They delegate the work or a
task to the follower and the followers are able to execute the task with little or no supervision at all. The
leaders will only interfere or help when asked for by the follower
2. Unable but willing: In this scenario the followers have the drive and hunger to do well and prove
themselves to the leader and the management, but they lack in experience. In such a situation the leader will
be more like a coach to the follower. He will set the overall goals, but will work with the follower and guide
them. The leader will give the freedom to the follower to plan and carry out the minute details, but at the
same time will keep an eye on their work and progress. At times leader will have to provide direction and
support and encourage the follower when he is low on confidence or is not able to execute the task.
3. Able but unwilling: In this scenario, the follower is fully capable of performing his or her job. They can
work with minimal supervision and need not be directed, but the problem is that the follower does not show
interest in his or her job and not willing to take up new responsibilities. In such situations the leaders must
take the role of a mentor and provide motivation to the follower and build confidence and make them feel
important and letting them know that they are a big asset to the organization.

11. What are the three main costs that relate to external failure costs?
The following are the three main costs that relate to external failure costs "Costs due to customer complaints
and returns, including rework on returned items, cancelled orders and freight premiums" "Product recall
costs and warranty claims, including the cost of repair or replacement as well as associated administrative
costs" "Product liability costs, resulting from legal actions and settlements" References Evans, James R..
Managing for Quality and Performance Excellence, 8th Edition. South Western Educational Publishing,
01/2010. p. 390 Comments: Recall costs & Warranty Claims Product liability costs

12. What are three of the five purposes of a performance measurement system?
The three purposes of a performance measurement system are the following: "Providing a perspective of the
past, present, and future" "Identifying trends and progress" "Facilitating understanding of cause-and-effect
relationships" References Evans, James R.. Managing for Quality and Performance Excellence, 8th Edition.
South Western Educational Publishing, 01/2010. p. 374

13. What three observations were made by Osborne and Gaebler concerning data?
The following three observations were made by Osborne and Gaebler concerning data "If you don’t measure
results, you can’t tell success from failure". "If you can’t see success, you can’t reward it and if you can’t
reward success, you are probably rewarding failure". "If you can’t recognize failure, you can’t correct it".
References Evans, James R.. Managing for Quality and Performance Excellence, 8th Edition. South Western
Educational Publishing, 01/2010. p. 364

14. Both Juran and Deming advocated ongoing product development. In fact, Deming's introductory lecture
to Japanese managers in 1950 contrasted the old way of product design-design it, make it, and try to sell it-
with a new way. List three of the six items in Deming s new way.
The three of the six items in Deming’s new way Design the product Make it and test it in the production line
and in the laboratory Put it on the market Test it Redesign the product in light of consumer reactions to
quality and price

15. Briefly describe design for manufacturability (DFM).

“Design for manufacturability (DFM) is the process of designing a product for efficient production at the
highest level of quality” which will meet the price target that customer is willing to pay. “Product design can
significantly affect the cost of manufacturing”, if the product design is complex and difficult to build or
manufacture. Some of the factors in product design which can affect manufacturability are: Parts that are
designed which cannot be easily integrated or shared Parts designed with features difficult to fabricate
repeatedly or with unnecessarily tight tolerances or parts which lack details for self-alignment. Designer’s
failure to consider conditions to which parts will be exposed during assembly such as temperature, humidity,
vibration, static electricity, and dust which might result in failures during testing or use. Use of too many
parts and part numbers All of the above factors can result in a poor quality product, inefficient operations,
poor yield, and product failures costing companies a lot of money. Keeping the design simple will reduce
company’s costs and help them develop a good quality product. Following are some of the design guideline
which can be followed for improving manufacturability Minimize Number of Parts Minimize Number of Part
Numbers Design for robustness Make assembly easy and fool proof Use Repeatable, Well-Understood
Processes Choose Parts That Can Survive Process Operations Design for Efficient and Adequate Testing
Lay Out Parts for Reliable Process Completion References Evans, James R, Managing for Quality and
Performance Excellence, 8th Edition, South Western Educational Publishing, 01/2010, pp. 599-600

16. What are three of the four reasons why "process improvement" is an important business strategy?
Process Improvement is an important business strategy because "Customer loyalty is driven by delivered
value". "Delivered value is created by business processes". "Sustained success in competitive markets
requires a business to continuously improve delivered value". "To continuously improve value-creation
ability, a business must continuously improve its value-creation processes". References Evans, James R..
Managing for Quality and Performance Excellence, 8th Edition. South Western Educational Publishing,
01/2010. p. 326

17. Define operations management

Operations management is the application of the basic concepts and principles of management to those
segments of the organization that produce its goods or services.

18. Provide an example of operations management that is used in the organization that is the subject of your
research paper.
At Lockheed Martin, the Production Planning and Control Program (PP&C) interacts daily with the
company's development and production functions. Within PP&C are four major functions. Program
planning, Operations planning, Material and Traffic Center and Operations systems. These four functions
are the checks and balances system within the PP&C. The functions drive production from program start to
finish.

Define point estimate

Approximation of a single quantity or a single numerical value, instead of that of a whole range of values.
Define standard error of the mean.
Standard error measures the accuracy with a sample that represents a population.

7. What are the three requirements of control?

1) Establishing standards
2) Monitoring results and comparing them to standards, and
 3) Correcting deviations.

8. What are the major points of the Sarbanes-Oxley Act of 2002

CEOs and CFOs must certify financial statements; certifying officers will face penalties for false
certification; public companies generally cannot make personal loans to executive officers or directors;
insiders must report any securities trading within two business days; SEC may require disclosure of
additional information; the act created several new crimes for securities violations.

TQM is based on three fundamental principles. Although simplistic, TQM management practices are
different than they are in non-TQM operations. Briefly describe how the two sets of management practices
are differ.
TQM focuses on
1) customers and stakeholders
2) participation and teamwork by everyone in the organization
3) a process focus supported by continuous improvement and learning.
Included are Leadership and strategic planning, human resources management, process management and
information and knowledge management. Non- TQM companies did little to understand external customer
requirements, much less those of internal customers. Managers and specialists controlled and directed
production systems, workers were told what to do and how to do it, and were rarely asked for input.
Teamwork was virtually non-existent.

Understanding why something works or does not work results in learning. What are the four stages of any
learning cycle?
The four stages of the learning cycle consists of
1) Planning
2) Execution of plans
3) Assessment of progress
4) Revision of plans based on assessment findings

What are the three questions should be addressed in a control process, (P. 363)? Where are we now? Where
do we want to be? How can we get there from here? How does the organization that is the subject of your
research paper, exercise control?
The company uses its annual report as an informational tool to communicate it's status to the employees and
the general public. The annual report describes new goals and future projects, announces new leadership
and reports on the overall financial status of the company.

Briefly explain how there are no losers in the Deming Prize.

The Deming Prize is awarded to all companies that meet a prescribed standard. However, the small number
of awards given each year is an indication of the difficulty of achieving the standard. The objectives are to
ensure that a company has so thoroughly deployed a quality process that it will continue to improve ling
after a prize is awarded. The application process has no 'losers'.
What are two of the five objectives of ISO 9000?
Two of the five ISO 9000 objectives are:
1) Achieve, maintain, and seek to continuously improve product quality(including services) in
relationship to requirements.
2) Improve the quality of operations to continually meet customers' and stakeholders' stated and implied
needs.
Answer the following three parts relating to the situational leadership theory:
 1. Discuss the leadership style that would be used if maturity level of the follower was “able and willing.”
2. Discuss the leadership style that would be used if maturity level of the follower was “unable but willing.”

3. Discuss the leadership style that would be used if maturity level of the follower was “able but unwilling.”
1. Delegating- In this style, subordinates can do their work with little supervision or support. (minimal task-
oriented behavior). Once the work is delegated, leaders take a hands-off approach (minimal relationship-
oriented behavior), except when asked to provide assistance by the subordinate. The followers are both able
and willing to work on a project by themselves with little supervision or support.
2. Coaching- In this style, leaders set the overall approach and direction but work with subordinates and
allow them to manage the details. Leaders might need to provide some direction, based on experience (task-
oriented behavior), or support (relationship-oriented behavior), to individual followers having the drive and
motivation to do a good job but who might lack some experience or skills.
3. Supporting- Here, leaders allocate tasks and set direction, but the subordinates have full control over the
performance of the work. These individuals do not need much supervision or direction (task-oriented
behavior), but they may require leadership to assist them in building motivation and confidence
(relationship-oriented behavior), particularly if the task is new.
Rio Hondo Company
Rio Hondo Company is a manufacturer of electronic components. The following manufacturing information is
available for the month of May:
Good units manufactured 40,000
Value-added hours of manufacturing time 20,000
Total units manufactured 50,000
Total hours of manufacturing time 30,000

76. Refer to Rio Hondo Company. What is the throughput per hour?
a. 1.3 units (rounded)
b. 2.0 units
c. 1.8 units
d. .8 units

x x = 1. units

77. Refer to Rio Hondo Company. What is the process quality yield?
a. 50%
b. 75%
c. 80%
d. 125%

= 80%

McAllen Company
One of the products manufactured by McAllen Company is a plastic disk. The information below relates to the Disk
Production Department:

Good units produced 200,000

Units started in production 250,000
Processing time (budgeted hours) 425
Processing time (total hours) 400
Value-added processing time 300

78. Refer to McAllen Company. What is the process quality yield in the Disk Production Department?
75%
44%
80%
125%

= 80%

79. Refer to McAllen Company. What is the throughput per hour in the Disk Production Department?
a. 470 units
b. 500 units
c. 625 units
d. 667 units

x x = 500 units

80. Refer to McAllen Company. What is the process productivity in the Disk Production Department?
588
625
667
833

= 833 units

1. Answer the following questions regarding economic value added (EVA):

a. What is it intended to do?
b. How is it measured?
c. How is the measurement different than that of RI?
d. Why is EVA a better performance measure of RI?
e. What is the major problem with using EVA as a long-term performance measure?
EVAS:
a. The purpose of EVA is to more directly align the interests of common shareholders and managers.
b. EVA = A/Tax profit - (market value of invested capital x cost of capital %).
c. EVA uses after-tax profit, cost of capital and market value of assets invested. RI uses segment income, target
rate of return and book value of assets invested.
d. Because it recognizes that there may be a significant difference between book value and market value of
assets.The market value of a company is reflected in stock prices which are another measure of performance
evaluation.
e. EVA includes the increased investment immediately even though significant income may not occur until
sometime in the future. Most investments will show decreased short-term performance (EVA) and may cause a
company to refuse projects that are profitable in the long-term (similar to shortcomings of the payback
method).

2. What items affect comparability of different divisions within the same company on the basis of EVA, ROI and RI?
1 2) Each measure is based on accounting income which can be manipulated in the short-
) term by accounting methods used, which can differ between investment centers.
a
 3 4) The measurement of the asset base is affected by the choice of what to include, and
) may include items that relate to decisions made by prior managers.
b

5 6) All measures focus primarily on how well the segments do in isolation with results
) compared to prior years for the same segment, rather than relative company-wide
c objectives.

3. Why is it likely that a subordinate manager would be more attentive to certain performance
measures than overall corporate objectives to guide his decision making?
Managers are evaluated based on how their actual results compare to specific measures of performance. These
performance measures are intended to be surrogates for the overall corporate goals as they apply to specific
managers. Thus performance measures are selected by the extent to which they are good proxies for corporate goals
(that is the extent to which they operationally define, and are consistent with, corporate goals) and are intended to be
major focal points for managers.

4. What are some of the major problems associated with accrual-based accounting performance
measures?
There are two major problems with accrual-based accounting numbers. The first problem is that they can be easily
manipulated by managers. For example, the timing of end of period transactions can be accelerated or delayed to
affect performance measures. Secondly, accounting measures cannot capture all corporate goals. Accounting
measures are particularly inappropriate to measure qualitative changes in the workforce, qualitative changes in
products, and achievement of social and non-monetary objectives. Additionally, accounting measures reflect only a
short-term perspective of operations rather than a long-range goal orientation.

5. What distinct advantage does a return on investment measure have over a residual income
measure? Explain.
The advantage of ROI measure over RI is that ROI facilitates a comparison of organizational sub-units of differing
sizes. Because ROI is a performance measure that automatically scales for size, large and small sub-units can be
compared to each other (subject to all the factors that should be considered when two units in different industries,
different geographical areas, etc. are compared).

6. How can return on investment result in sub-optimization when it is used as a performance

measure?
Because performance measures are used to reward performance, managers use them as decision criteria when they
evaluate alternative courses of action. For example, if ROI is the performance criterion, a division manager will only
invest in new projects that will result in an increase in his/her division's ROI. This is sub-optimal if the overall
organization would be better off by the division manager's investment in available projects with lower ROIs.

7. Define residual income. Evaluate residual income as a measure of performance.

Residual income is the remainder of net profit once a target cost of capital has been taken into consideration. Residual
income is determined by deducting from net income a prescribed or imputed interest charge on assets. This method
allows an organization to use different rates of interest for various organizational assets. A main advantage of using RI
is that it overcomes some limitations of ROI (sub-optimization).

8. What are some common problems encountered in determining ROI?

Net income and investment involved can both be calculated several ways. Multiple calculations are often presented to
show the different factors that affect ROI, changes in sales, expenses, and capital investments.

9. Discuss the ways in which management uses flexible budgets.

Flexible budgets are important to managers in performing a variety of functions. Formulating budgets commits
certain activities agreed to during the planning process to specific monetary amounts. The flexible budget provides the
means to estimate costs at various levels of activity. The control function is undertaken to assure that actual operations
meet planned operations. Through this function, deviations are determined and variances can be ascertained.
Managers also use flexible budgets in performance evaluation. Evaluation is more meaningful with valid and accurate
data to make the process of evaluation beneficial to all involved.

10. Identify the steps to follow in establishing the performance reward system for a company.
The steps are in the following order:
1) set strategic goals
2) identify the critical success factors
3) set the compensation strategy
4) identify performance measures
5) set performance rewards
6) measure/monitor performance
7) determine rewards

11. Discuss pay-for-performance plans.

Employees should be encouraged by compensation plans to perform and be loyal to the organization. Performance
measures should be related to a company's operational targets. These performance measures do not have to be evenly
weighted. Management can assign higher weights to more important performance measures as they are related to the
corporate goals.

12. Discuss the rethinking taking place regarding the time frame used in American business
performance systems.
Historically, American time frames for performance have been short term, often only one year. Presumably
management tries to do what is best for the firm and its owners. Thus, shareholder wealth maximization should be the
primary focus of management. Short term profit maximization doesn't necessarily result in long-run shareholder
wealth maximization.
To encourage this different attitude, employees and management are being asked to take a longer run perspective. This
is enhanced with employee stock ownership in their firm.

13. Deferred compensation techniques are currently used in the American work place. What are
they and how do they benefit the employer and the employee?
Deferred compensation is pay that was earned on current performance but is paid later to the employee. The
compensation may include profit sharing plans, pensions, and stock-based plans like ESOPs. The payment by the
employer can be deducted currently for tax purposes but the employee doesn't recognize it as income until it is
received. In stock option plans, earnings in the plan are not taxable to the employee until the plan is distributed. Size
of the plans is affected by the firm’s stock value and encourages employees to take a more positive attitude about the
company's future.

14. List the five general criteria that should be considered when designing a performance
measurement system.
1. The measures should be established to assess progress toward the organizational mission
and its related goals and objectives.
2. The persons being evaluated should be aware of the measurements used and have some
input in developing them.
3. The persons being evaluated should have the appropriate skills, equipment, information, and
authority to be successful under the measurement system.
4. Feedback of accomplishment should be provided in a timely and useful manner.
5. The system should be flexible to adapt to new conditions in the organizational environment.

15. What are five advantages that nonfinancial performance measures have over financial
performance measures?
Compared to financial measures, nonfinancial performance measures are more:
• relevant to non-management employees who are generally more familiar with nonfinancial items
• (such as times and quantities) than financial items (such as costs or profits)
• timely than historical financial data and, thus, more apt to indicate where problems lie or where
• benefits can be obtained
• reflective of the leading indicators of activities that create shareholder wealth, such as
• manufacturing and delivering quality goods and services and providing service for the customer
• causative of goal-congruent behavior (rather than sub-optimization) because they promote
• long-term success rather than the short-term success promoted by financial measures
• integrated with organizational effectiveness because they can be designed to focus on
• processes rather than simply outputs
• indicative of productive activity and the direction of future cash flows
• appropriate for gauging teamwork because they can focus on outputs that result from
• organizational effort (such as quality) rather than inputs (such as costs)
• cross functional than financial measures, which are generally related to one function
• comparable for benchmarking externally than financial measures (which can be dramatically
• affected by differences in accounting methods)
• aligned with the reward system because they are more likely to be under the control of
• lower-level employees than are financial measures

Entertainment Division
The Entertainment Division is one of the operating units of Software Solutions, Inc. The following operating data of
the division is presented below:
Sales $3,000,000
Profit margin 10%
Target return 15%
Residual income $ 60,000

1. Refer to the Entertainment Division. What was the segment income of the Entertainment
Division for the year?
Segment income = Profit Margin * Sales = .10 * $3,000,000 = $300,000

2. Refer to Entertainment Division. What was the return on investment for the Entertainment
Division?
ANS:
ROI = Segment Income/Assets
Segment Income = $3,000,000 * .10 = $300,000
Assets = ($300,000 - $60,000)/.15 = $1,600,000
ROI = $300,000/$1,600,000 = 18.75%

Eastern Division
The Eastern Division of Texas Chemical Co. produced the following operating results for the previous year:
Sales $10,000,000
Segment income 1,500,000
Assets 6,000,000
The Eastern Division is considering a $1,000,000 investment in a new project. The Eastern Division estimates that its
return on investment (for all of its operations) would be at 22% with the new investment.

3. Refer to Eastern Division. How much net segment income is the new project expected to
produce?
The total of the new segment income = .22($6,000,000+$1,000,000) = .22($7,000,000) = $1,540,000
The portion of the total segment income that is produced by the new project = $1,540,000 - $1,500,000 = $40,000

4. Refer to Eastern Division. If the manager of the Eastern Division is evaluated on return on
investment alone, will the manager invest in the new project? Explain.
The manager would not invest in the new project because the new project would lower the Division's ROI from the
current 25% ($1,500,000/$6,000,000) to 22%. The new project only generates an ROI of 4% ($40,000/$1,000,000)
5. The manager of the Waco Division of National Church Tours is preparing the budget for the
upcoming year. At this point, he has determined that average total assets for the upcoming year will equal $4,000,000.
The manager is evaluated on the amount of residual income generated by the division. Assume variable costs in the
Waco Division are expected to equal 60% of total sales and fixed costs are expected to equal $400,000.
a. Compute the sales level that would generate a 20% return on investment.
b. Assuming the rate of return is 15%, determine the level of sales that would generate $200,000
of residual income.
ANS:
a. The required net income = 20% x $4,000,000 = $800,000.
sales = net income + fixed costs + variable costs
sales = $800,000 +| $400,000 + (.60 x sales)
sales x 40% = $1,200,000
sales = $3,000,000

b. sales = fixed costs + variable costs + required return + residual income

sales = $400,000 + (.60 x sales) + (.15 x sales) + $200,000
sales = $2,400,000

6. The following information is given for Alpha and Beta Divisions of Fraternity Corporation.
Alpha Beta
Sales $600,000 $300,000
Var. cost of goods sold 200,000 150,000
Fixed manufacturing costs 50,000 40,000
Variable selling 30,000 5,000
Fixed admin. (50% allocated) 20,000 4,000
Fixed selling (20% allocated) 50,000 30,000
Assets at cost 800,000 600,000
Accumulated depreciation 200,000 100,000

a. If Fraternity Corporation uses income to evaluate division managers, compute net income that
should be used for that purpose given the limited data above.
b. If Fraternity Corporation uses ROI to evaluate division managers and uses historical cost as the
investment base, compute the ROI for Alpha and Beta.
ANS:
a. Alpha Beta
Sales $600,000 $300,000
CGS (250,000) (190,000)
Gross Margin $350,000 $110,000
Variable selling (30,000) (5,000)
Fixed admin (10,000) (2,000)
Fixed selling (40,000) (24,000)
Controllable income $270,000 $ 79,000

b. Alpha Beta
$270,000 x $800,000 $79,000 x $600,000
= 33.75% = 13.17%

7. Information for two divisions of Charming Confections Company is given below:

Peanut Plain
Net income $ 60,000 $100,000
Capital investment $400,000 $500,000

a. If Charming Confections Company charges each division 12% for capital employed, compute
 residual income for the Peanut and Plain divisions.
b. Compute the ROI for each division.
ANS:
a. Peanut Plain
Net income $60,000 $100,000
Interest charge (48,000) (60,000)
Residual income $12,000 $ 40,000

b. ROI $60,000 x $400,000 $100,000 x $500,000

= 15% = 20%

8. Innovative Furnishing Solutions (IFS), a division of Steelman Corporation buys and installs
modular office components. For the most recent year, the division had the following performance targets:
Asset turnover 2.5
Profit margin 6%
Target rate of return on investments for RI 13%
Cost of capital 10%
Income tax rate 40%

Actual information concerning the company's performance for last year follows:
Total assets at beginning of year $3,600,000
Total assets at end of year 5,300,000
Total invested capital (annual average) 8,000,000
Sales 9,000,000
Variable operating costs 3,650,000
Direct fixed costs 4,770,000
Allocated fixed costs 675,000
Required:
a. For IFS, compute the segment margin and the average assets for the year.
b. Based on segment margin and average assets, compute the profit margin, asset turnover and
ROI.
c. Evaluate the ROI performance of IFS.
d. Using your answers from part b., compute the residual income of IFS.
e. Compute the EVA of IFS. Why are the EVA and RI levels different?
f. Based on the data given in the problem, discuss why ROI, EVA and RI may be inappropriate
measures of performance for IFS.
ANS:
a. Sales $9,000,000
Variable costs (3,650,000)
Direct fixed costs (4,770,000)
Segment margin $ 580,000
Average assets = ($3,600,000 + $5,300,000) / 2 = $4,450,000

b. Profit margin = $580,000 / $9,000,000 = 6.44%

Asset turnover = $9,000,000 / $4,450,000 = 2.02
ROI = $580,000 / $4,450,000 = 13%
c. The target ROI for the division was 2.5 x 6 = 15%. The division generated an ROI of only 13%. Thus the division
did not achieve its target rate of return. The poor performance resulted from the division’s failure to achieve its
targeted asset turnover.

d. RI = $580,000 - (13% x $4,450,000) = $580,000 - $578,500 = $1500

e. After-tax profits = pretax income – taxes = $580,000 - ($580,000 x 40%) =
$348,000
EVA = $348,000 - ($8,000,000 x 10%) = $(452,000)
EVA and RI differ for three reasons. First, RI is based on pre-tax rather than after-tax income. Second, RI is based on
the book value of investment, whereas EVA is based on the market value of investment. Third, the target rates of return
differ between the methods.

f. ROI, RI and EVA are measures of short-term performance. These measures may be particularly inappropriate for
divisions that have long-term missions (such as high growth). In this case, the relatively large growth and assets of IFS
from the beginning of the period to the end of the period may indicate this division is oriented to growth. If so, the
ROI, RI and EVA measures will provide an incentive contrary to the growth mission.

9. The Cuddly Creations Company produces small plastic dolls in its Georgia manufacturing
plant. The company is currently evaluating ways to improve productivity. The accountant of the firm's parent
organization suggested that management implement a new compensation plan based on throughput performance
measure as an incentive to increase productivity. To demonstrate how such a measure might work, the accountant
gathered the following production data for a recent month:
Total units attempted 6,000,000
Good units manufactured 4,800,000
Processing time (total hours) 800
Value-added processing time 600
a. How many defective units were produced?
b. Compute manufacturing cycle efficiency.
c. Compute process productivity.
d. Compute process quality yield.
e. Compute hourly throughput.
ANS:
a. Defective units = 6,000,000 - 4,800,000 = 1,200,000
b. MCE = 600 ( 800 = 75%
c. Process productivity = 6,000,000 ( 600 = 10,000 units per hour
d. Process quality yield = 4,800,000 ( 6,000,000 = 80%
e. Throughput = 10,000 x .75 x .8 = 6,000 dolls per hour

36. The information below relates to costs, revenues, and assets anticipated in the Boot Division of BVD
Footwear Corporation:
Sales $ 4,000,000
Variable costs 75% of sales
Average assets employed $12,000,000
Fixed costs 0
How would each of the following measures be affected if sales rise by $5,000 in the Boot Division?
ROI Asset turnover Profit margin
a. increase increase increase
b. increase no change increase
c. increase increase no change
d. no changeno change increase
37. A division of Lachman Corporation reported a return on investment of 20% for a recent
period. If the division's asset turnover was 5, its profit margin must have been
a. 100%
b. 4%
c. 25%
d. 2%

ROI = Profit Margin x Asset Turnover

.20 = PM x 5
PM = ROI/Asset Turnover
PM = .04 or 4%

38. Which measure is limited by the fact that it uses accounting income?
a. ROI
b. RI
c. EVA
d. All of the above
39. The Cake Division of Bakery Corporation has the following segment information:
$1,800,000
Assets available for use
Target rate of return 10%
Residual income $ 270,000

What was Cake Division's return on investment?

a. 15%
b. 10%
c. 25%
d. 20%
ROI = Income / Assets Invested

Income = Residual Income + (Target Rate * Assets)

= $270,000 + (.10 * $1,800,000)
= $450,000

ROI = $(450,000/1,800,000)
= 25%

United Toy Company

The Doll Division of United Toy Company had the following financial data for the year:
Assets available for use $1,000,000 Book Value
$1,500,000 Market Value
Residual income $100,000
Return on investment 15%

40. Refer to United Toy Company. What was the Doll Division’s segment income?
a. $150,000
b. $100,000
c. $250,000
d. $ 50,000
Segment Income = ROI * BV of Total Assets
= 0.15 * $1,000,000
= $150,000

41. Refer to United Toy Company. What was the target rate of return for United Toy Company?
a. 10%
b. 15%
c. 25%
d. 5%
Net Income - (Target Rate x Asset Base) = Residual Income
$150,000 - (Target Rate x $1,000,000) = $100,000
(Target Rate x $1,000,000) = $50,000
Target Rate = 5.0%

42. Refer to United Toy Company. If the manager of the Doll Division is evaluated based on
return on investment, how much would she be willing to pay for an investment that promises to increase net segment
income by $50,000?
a. $ 50,000
b. $ 333,333
c. $1,000,000
d. $ 500,000
$50,000 / 0.15 = $333,333

43. Refer to United Toy Company. If expenses increased by $20,000 in Apple Division,
a. return on investment would decrease.
b. residual income would increase.
c. the target rate of return would decrease.
d. asset turnover would decrease.
Houston Company
Texas Division of the Houston Company has the following statistics for its most recent operations:
Assets available for use (Market Value) $3,600,000
Assets available for use (Book Value) $2,000,000
Texas Division's return on investment 25%
Texas Division's residual income 200,000
Return on investment (entire Houston Company) 20%

44. Refer to Houston Company. Compute EVA assuming the cost of capital is 10% and the tax
rate is 40%.
a. $ 90,000
b. $ 150,000
c. $0
d. $ (60,000)
EVA = After Tax Net Income - (Cost of Capital x Market Value of Assets)
EVA = (($2,000,000 * .25) x .60) - (.10 x $3,600,000)
EVA = $(300,000 - 360,000)
EVA = $(60,000)

45. Refer to Houston Company. What is the target rate of return in Houston Company?
a. 25%
b. 20%
c. 15%
d. 10%
Net Income - (Target Rate of Return x Total assets) = Residual Income
$500,000 - (Target Rate of Return * $2,000,000) = $200,000
Target Rate of Return * $2,000,000 = $300,000
Target Rate of Return = 15%

46. Refer to Houston Company. If Houston Company evaluates its managers on the basis of return
on investment, the manager of Texas Division would invest in a project costing $100,000 only if it increased net
segment income by at least
a. $10,000.
b. $15,000.
c. $20,000.
d. $25,000.
$100,000 * .25 = $25,000

47. Andersen Corporation has a target return of 15%. If a prospective investment has an estimated
return on investment of 20%, and a residual income of $10,000, what is the estimated cost of the investment?
a. $200,000
b. $ 66,667
c. $ 50,000
d. The answer can't be determined from this information.
0.20 - 0.15 = 0.05 residual income
$10,000 / 0.05 = $200,000

48. The Steelrod Division of Metal Products Company is considering an investment in a new
project. The project has an estimated cost of $1,000,000. If Metal Products Company has a target rate of return of 12%,
how large does the return on investment on this project need to be to generate $150,000 of residual income?
a. 15%
b. 12%
c. 25%
d. 27%
(ROI x Total Assets) - (Target Rate x Total Assets) = Residual Income
(ROI x $1,000,000) - (0.12 x $1,000,000) = $150,000
(ROI x $1,000,000) = $270,000
ROI = 27%

49. In the South Division of Occident Company, segment income for the most recent year
exceeded residual income by $15,000. Also, return on investment exceeded the target rate of return by 10%. What was
the level of investment in the X Division for the most recent year?
a. $ 15,000
b. $100,000
c. $150,000
d. An answer can't be determined from this information.
$15,000/0.10 = $150,000

RAD Company
RAD Co. has established a target rate of return of 16% for all divisions. For the most recent year, Division D generated
sales of $10,000,000 and expenses of $7,500,000. Total assets at the beginning of the year were $5,000,000 and total
assets at the end of the year were $7,000,000.

50. Refer to RAD Company. In the most recent year, what was Division D's residual income?
a. $ 960,000
b. $1,380,000
c. $1.540,000
d. $1,700,000
Residual Income = $(10,000,000 - 7,500,000) - ((.16) * $6,000,000)
= $(2,500,000 - 960,000)
=$1,540,000

51. Refer to RAD Company. For the most recent year, what was Division D's return on investment
?
a. 20.83 %
b. 35.71 %
c. 41.67 %
d. 50.00 %
ROI = Net Income/Average Total Assets
= $(2,500,000/6,000,000)
= 41.67%

52. The Card Division of Party Company reported the following results for a recent year
Sales $8,000,000
Expenses 6,250,000
Total assets (1/1) 5,000,000
Total assets (12/31) 5,400,000

What was the profit margin for the Card Division?

a. 68%
b. 35%
c. 32%
d. 22%
Profit Margin = Gross Margin/Sales
=$(1,750,000/8,000,000)
=22%

53. The Card Division of Party Company reported the following results for a recent year
Sales $8,000,000
Expenses 6,250,000
Total assets (1/1) 5,000,000
Total assets (12/31) 5,400,000

What was the asset turnover ratio of the Card Division?

a. 1.538
b. 2.97
c. 0.650
d. 1.20
$8,000,000/($((5,000,000 + 5,400,000)/2) = 1.538

54. Empire Division of New York Delights, is evaluated based on residual income generated. In
the most recent year, the Empire Division generated a residual income of $2,000,000 and net income of $5,000,000.
The target rate of return for all divisions of New York Delights is 20%. What was the return on investment for the
Empire Division?
a. 40%
b. 13%
c. 20%
d. 33%
(Net Income) - (Target Rate x Total Assets) = Residual Income
($5,000,000) - (0.20 x Total Assets) = $2,000,000
(0.20 x Total Assets) = $3,000,000
Total Assets = $15,000,000
ROI = (5,000,000/15,000,000)
ROI = 33%

Answer the following questions concerning cultural change and the workforce:
1. Discuss three of the five behaviors that Juran and others suggest are needed to develop quality cultural change. (10
points)
2. Discuss ownership at the workforce level and why it is important to the implementation of TQM. (10 points)
3. Discuss how increased ownership requires increased sharing of information. (10 points)
       
Answer the following questions concerning ISO 9000:
1. The ISO 9001—Requirements document is organized into four sections. Discuss three of the four sections.
2. Discuss how ISO 9000:2000 is different than older standards.
3. Discuss three of the eight quality management principles of ISO 9000:2000.
Deming’s Profound Knowledge consists of four elements. Answer the following three parts relating to the “variation”
element of Deming’s Profound Knowledge. Your discussion should relate to this element of Deming's Profound
Knowledge and not variation in general.
1. Explain the how a quincunx can be used to explain variation.
2. Why is understanding variation important, and what do we need to do about it?
3. What tools do we need to use to understand variation, and why is using these tools important to our decision-making
process?

73. What does it mean when we say that a process is capable?

A process is capable when the mean and standard deviation of the process are operating such that the upper and lower
control limits are acceptable relative to the upper and lower specification limits.

74. Explain the difference between producer's risk and consumer's risk in acceptance sampling.

Producer's risk (alpha) is the probability of rejecting a high quality lot while consumer's risk (beta) is the probability
of accepting a low-quality lot.

75. What is the difference between statistical process control (SPC) and statistical quality control (SQC)?

Statistical process control (SPC) is concerned with monitoring quality while the product or service is being produced.
SPC involves taking samples of output to determine whether a process is producing product within the desired range.
Statistical quality control (SQC) includes the idea of SPC but also includes checking quality levels of products and
services after production is complete.