Answer the following questions using the information below:
Cysco Corp has a budget of $1,200,000 in 2015 for prevention costs. If it decides to automate a portion of
its prevention activities, it will save $100,000 in variable costs. The new method will require $50,000 in
training costs and $140,000 in annual equipment costs. Management is willing to adjust the budget for an
amount up to the cost of the new equipment. The budgeted production level is 200,000 units.
Appraisal costs for the year are budgeted at $500,000. The new prevention procedures will save appraisal
costs of $50,000. Internal failure costs average $30 per failed unit of finished goods. The internal failure
rate is expected to be 5% of all completed items. The proposed changes will cut the internal failure rate by
one-half. Internal failure units are destroyed. External failure costs average $50 per failed unit. The
company’s average external failures average 2.5% of units sold. The new proposal will reduce this rate to
1%. Assume all units produced are sold and there are no ending inventories.
9) What is the net change in the budget of prevention costs if the procedures are automated in 2015? Will
management agree with the changes?
A) $100,000 decrease, yes
B) $90,000 decrease, yes
C) $100,000 increase, no
D) $90,000 increase, yes
10) How much will appraisal costs change assuming that the new prevention methods reduce material
failures by 30% in the appraisal phase?
A) $150,000 decrease
B) $229,000 decrease
C) $50,000 increase
D) $50,000 decrease
11) How much will internal failure costs change if the internal product failures are reduced by 40% with
the new procedures?
A) $138,000 decrease
B) $126,000 decrease
C) $120,000 decrease
D) $84,000 increase
12) How much do external failure costs change if all the changes are as the new prevention procedures
anticipated? Assume all units produced are sold and there are no ending inventories.
A) $126,000 decrease
B) $150,000 decrease
C) $100,000 decrease
D) $122,400 decrease
13) Management has offered to allow the prevention changes if all changes take place as anticipated and
the amounts netted are less than the cost of the equipment. What is the net impact of all the changes
created by the preventive changes?
A) $185,200
B) $(230,000)
C) $(234,000)
D) $(250,000)
14) Relevant-cost and relevant-revenue analysis uses the allocated costs as the base for calculating the
costs of a quality improvement program.
15) Strykerz Corp expects to spend $800,000 in 2015 in appraisal costs if it does not change its incoming
materials inspection method. If it decides to implement a new receiving method, it will save $60,000 in
fixed appraisal costs and variable costs of $0.50 per unit of finished product. The new method involves
$140,000 in training costs and an additional $150,000 in annual equipment rental.
Internal failure costs average $160 per failed unit of finished goods. During 2014, 5% of all completed
items had to be reworked. External failure costs average $400 per failed unit. The company’s average
external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a
per order basis and a just-in-time inventory ordering method is used.
How much will external failure costs change assuming 800,000 units of materials are received and that
product failures with customers are cut in half with the new receiving method?
A) $20,000 increase
B) $400,000 decrease
C) $640,000 decrease
D) $800,000 decrease
16) In successful quality programs, companies decrease costs of quality and, in particular, internal and
external failure costs as a percentage of revenues.
17) The financial cost of quality measures serves as a common denominator for evaluating trade-offs
among prevention costs and failure costs.
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18) COQ reports provide more insight about quality improvements and allow managers to compare
trends over time.
19) Cost of quality financial measures will usually deteriorate when nonfinancial measures of quality are
emphasized and improved.
20) Venlaz Corp makes small motorcycles. The monthly demand ranges from 80 to 100 motorcycles. The
average demand is 92 motorcycles. The plant operates 300 hours a month. Each cycle takes approximately
1.5 hours.
If the company adds a new line of scooters, initial demand will be 20 per month. Each scooter will take 1
hour to make. To offset approaching production capacity, expanding the assembly line is possible. This
will decrease manufacturing time for all products by 20%. However, this will increase the costs of cycles
from $400 to $500 and scooters from $200 to $240. The change will also cause increases in prices from $700
to $750 for cycles and from $450 to $500 for scooters.
Required:
a. What is the average waiting time for cycles if they are the only item manufactured?
b. What are the average waiting times if both cycles and scooters are produced and the assembly line is
not enlarged?
c. What are the average waiting times if both cycles and scooters are produced and the assembly line is
enlarged?
d. What is the expected monthly margin without scooters if the company sells all 92 cycles it
manufactures?
e. What are the expected monthly contribution margins if scooters are made with the current assembly
line and with the new assembly line? Assume average sales and that sales equal production.
f. What action do you recommend?
Objective 19.4
1) Which of the following is an advantage of COQ measures?
A) They help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and
appraisal costs to eliminate internal and external failure costs.
B) They detect and provide immediate short-run feedback on whether quality-improvement efforts are
succeeding.
C) They forecast customer satisfaction and employee satisfaction, which are useful indicators of long-run
performance.
D) They direct attention to financial processes that help managers identify the precise problem areas that
need improvement.
2) Which of the following is an advantage of nonfinancial measures of quality?
A) They help managers aggregate costs to evaluate the tradeoffs of incurring prevention costs and
appraisal costs to eliminate internal and external failure costs.
B) They detect and provide immediate short-run feedback on whether quality-improvement efforts are
succeeding.
C) They focus managers’ attention on how poor quality affects operating income.
D) They direct attention to financial processes that help managers identify the precise problem areas that
need improvement.
3) Which of the following true of nonfinancial measures of quality?
A) They direct attention to financial processes that help managers identify the precise problem areas that
need improvement.
B) They focus managers’ attention on how poor quality affects operating income.
C) They assist in problem solving by comparing costs and benefits of different quality-improvement
programs and by setting priorities for cost reduction.
D) They provide immediate short-run feedback on whether quality-improvement efforts are succeeding.
4) An advantage of nonfinancial measures of quality include that they ________.
A) focus managers’ attention on how poor quality affects operating income
B) assist in problem solving by comparing costs and benefits of different quality-improvement programs
and by setting priorities for cost reduction
C) are useful indicators of future long-run performance
D) use certain statistical measures to justify their data
5) Which of the following is true of COQ measures?
A) They forecast customer satisfaction and employee satisfaction, which are useful indicators of long-run
performance.
B) They focus managers’ attention on how poor quality affects operating income.
C) They direct attention to financial processes that help managers identify the precise problem areas that
need improvement.
D) They provide immediate short-run feedback on whether quality-improvement efforts are succeeding.
6) Without financial quality measures, ________.
A) customer satisfaction and employee satisfaction cannot be measured
B) the short-run effectiveness of nonfinancial quality measures is questionable
C) cost-benefit analysis is not possible
D) quality problems might not be identified until it is too late
7) Without nonfinancial quality measures, ________.
A) the operating income cannot be improved
B) the short-run effectiveness of financial quality measures is questionable
C) the precise problem areas that need improvement cannot be identified
D) quality problems might not be identified until it is too late
8) COQ measures such as measures of customer satisfaction and employee satisfaction are useful
indicators of long-run performance.
9) Total costs of quality help managers aggregate costs to evaluate the tradeoffs of incurring prevention
costs and appraisal costs to eliminate internal and external failure costs.
10) Distribution of questionnaires to customers regarding product quality and improving the product on
certain key areas based on the inferences drawn from the questionnaires is an example of a nonfinancial
measure of quality.
1) The amount of time from when a customer places an order for a product or requests a service to when
the product or service is delivered to the customer is referred to as ________.
A) manufacturing lead time
B) delivery time
C) customer-response time
D) a time driver
2) Customer-response time is ________.
A) the amount of time from when an order is ready to start on the production line to when the product or
service is delivered to the customer
B) the amount of time it takes to deliver a completed order to a customer
C) the amount of time from when a customer places an order for a product or requests a service to when
the product or service is delivered to the customer
D) the amount of time from when an order is ready to start on the production line to when it becomes a
finished good
3) The amount of time from when an order is ready to start on the production line to when it becomes a
finished good is referred to as ________.
A) manufacturing time
B) time driver
C) customer-response time
D) delivery time
4) Manufacturing cycle time is ________.
A) the amount of time it takes from when an order is ready to start on the production line to when the
product or service is delivered to the customer
B) the amount of time it takes to deliver a completed order to a customer plus its waiting time
C) the amount of time it takes from when a customer places an order for a product or requests a service to
when the product or service is delivered to the customer
D) the amount of time it takes from when an order is ready to start on the production line to when it
becomes a finished good plus its waiting time
5) Which of the following is the mathematical expression for calculating manufacturing cycle
efficiency(MCE)?
A) MCE = Manufacturing cycle time ÷ Value-added manufacturing time
B) MCE = Manufacturing time ÷ Value-added manufacturing time
C) MCE = Value-added manufacturing time ÷ Manufacturing cycle time
D) MCE = Value-added manufacturing time ÷ Manufacturing time
6) Any factor where a change in the factor causes a change in the speed with which an activity is
undertaken is referred to as ________.
A) a time driver
B) a cost driver
C) manufacturing lead time
D) customer-response time
7) Which of the following is true of a bottleneck?
A) It occurs in an operation when the work to be performed approaches or exceeds the capacity available
to do it.
B) It occurs in an operation when there is excess capacity to complete the work given.
C) It is the uncertainty about when customers will order products or services.
D) It is the time taken by a manufacturing department to produce a finished product.
8) The time it takes the marketing department to specify to the manufacturing department the exact
requirements of the customer’s order is referred as ________.
A) receipt time
B) waiting time
C) delivery time
D) manufacturing cycle time
9) Customer response time comprises of ________.
A) manufacturing cycle time and delivery time only
B) receipt time and manufacturing cycle time only
C) receipt time, manufacturing cycle time, and delivery time
D) manufacturing time and delivery time only
10) The time from which a machine is setup for order till the product becomes a manufactured good is
________.
A) waiting time
B) manufacturing time
C) manufacturing cycle time
D) customer-response time
11) The time from which a machine setup begins for an order until the product is delivered to the
customer is the ________.
A) delivery time only
B) manufacturing time plus the waiting time
C) manufacturing time plus the delivery time
D) customer-response time minus the receipt time
12) Tony placed an order for a customized watch. The customer response time is 36 hours, its receipt time
is 8 hours, and manufacturing cycle time is 24 hours. Calculate the delivery time of the product.
A) 12 hours
B) 4 hours
C) 16 hours
D) 2 hours
13) Zenich Corp manufactures laptops. The waiting time is 60 minutes before the start of production and
the manufacturing lead time is 150 minutes per laptop. What is its manufacturing cycle efficiency?
A) 40%
B) 70%
C) 60%
D) 66.67%
14) Ventaz Corp manufactures keyboards. The manufacturing cycle efficiency is 40%. What is its
manufacturing time for value added if the manufacturing lead time is 120 minutes per keyboard?
A) 38.50 minutes
B) 60.00 minutes
C) 48.00 minutes
D) 54.00 minutes
15) Ventaz Corp manufactures glasses. The manufacturing cycle efficiency is 70%. What is its waiting
time if the manufacturing lead time is 120 minutes per keyboard?
A) 38.00 minutes
B) 42.00 minutes
C) 48.00 minutes
D) 36.00 minutes.
16) Alex is injured and rushed to Care Hospitals for treatment. He spent 45 minutes at the hospital out of
which he filled a form for 15 minutes, stood in the queue for 10 minutes, doctor treated him for 15
minutes, and payment time was 5 minutes. What is the service cycle efficiency for his visit?
A) 18.50%
B) 11.11%
C) 66.67%
D) 33.33%
17) In the formula for calculating the average waiting time, the squared manufacturing time indicates
________.
A) that the shorter the manufacturing time, the greater the chance that the machine will remain idle in the
process
B) that the shorter the manufacturing time, the greater the chance that the machine will be in use when an
order arrives
C) the disproportionately large impact the manufacturing time has on the waiting time
D) a measure of the unused capacity or cushion
18) For a fast-food restaurant, the average waiting time can be formulated as ________.
A)
B)
C)
D)
Answer the following questions using the information below:
Ventaz Corp has a variable demand. Historically, its demand has ranged from 30 to 50 windows per day
with an average of 40. Alex works eight hours a day, five days a week. Each order is one window and
each window takes 11 minutes.
19) What is the average waiting time in minutes?
A) 12.00
B) 55.50
C) 60.50
D) 20.00
20) What is the cycle time for an order?
A) 11 minutes per window
B) 66 minutes per window
C) 71.50 minutes per window
D) 69.50 minutes per window
21) Alex plans to add doors to its product line and anticipates that they will average 3 doors per day.
Each door takes 10 minutes to install.
What is the average waiting time, in minutes, if Alex continues to be the only worker?
A) 237.0 minutes
B) 337.0 minutes
C) 257.0 minutes
D) 720.0 minutes