978-0133058789 Chapter 9 Part 2

9-41 (20-30 min.)

Units Total Average

Week Completed Cycle Time Cycle Time

1 564 14,108 25.0

2 544 14,592 26.8

388

Regardless of the alternative chosen, another question is whether the

measurement should be based on historical costs, replacement costs, net

realizable value, or some other alternative.

b. Market position. Share of served markets. How is a market defined? For

example, should the market consist of that served by the electric-range

industry only? Or should it consist of all ranges, including gas ranges?

Note that this area is important because a division could be showing

handsome profitability yet simultaneously be losing its share of the

market.

c. Productivity. This measure attempts to gauge efficiency. Productivity

focuses on physical and/or financial relationships between inputs and

outputs. Through the years, there have been various attempts, both by

General Electric and others, to measure productivity for a division (as

opposed to an individual worker or small cost center, where the

d. Product leadership. This still tends to be a qualitative evaluation, but at

least it should be conducted routinely on a standard evaluation form.

Among the questions asked are: How does each product compare with its

competition and general company standards? Where is the research

conducted? Who introduced the basic product (for example, did G.E. or

389

g. Public responsibility. Measures are routine but less precise, as you might

expect. Explicit surveys of executive participation in community affairs

and public attitudes are used.

h. Balance between short-range and long-range goals. This balance is not

measured separately. It is included in the eight-point list to reinforce the

basic idea of the entire measurements project. Note that areas (b) through

(g) essentially counteract the built-in tendency of the accounting

2. By its very reliance on the other goals, G.E. must believe that profitability cannot

9-43 (30 min.)

1. RICHFIELD HONDA

Parts and Vehicle

Service Sales

Sales $500,000 $3,100,000

Cost of sales $2,480,000

Sales.

2. The operating statement by departments would be the same as (1) through

“mark-up on variable material and labor.” At that point general overhead should

be allocated $30,000 to Parts and Service and $89,000 to Vehicle Sales. The

remaining $61,000 of general overhead should not be allocated at all. The

bottom of the income statement would appear as follows:

3. Note that both approaches yield exactly the same evaluation of income for the

dealership as a whole. The first approach regards only one function of the

dealership as a source of net income and therefore allocates just enough general

391

9-44 (35-45 min.)

1. A = 800,000 X = .50 Z = 1.00

F = 800,000 Y = .80

2. A = 800,000 F = 700,000

Performance = (Y × F) + [X × (A – F)]

= (.80 × 700,000) + .50(800,000 – 700,000)

= 560,000 + 50,000

3. When actual volume falls short of target, additional production increases the

performance measure by Z = 1.0 per TV. It is worthwhile to achieve as much

9-45 (15-20 min.) Students may suggest a variety of measures. There is not a single

right measure for each objective. Listed below are some possible measures:

1. Maintain strong financial health

2. Provide excellent service to customers

a. Customer satisfaction surveys

3. Be among the industry leaders in product and process innovations

4. Develop and maintain efficient, state-of-the-art production processes

1. (a) Prevention cost — This includes costs incurred to prevent the production of

defective products, such as programs to train personnel, simplified

production processes, and improved production planning. These costs

have increased between 20X4 and 20X6 both in absolute amount and as a

percent of total quality cost. Apparently more attention is now being

2. The overall costs of quality are much lower in 20X6 than in 20X4. The decrease

comes primarily in the two categories of internal and external failure costs. Red

Lake is following a popular approach to modern quality control: Preventing

9-47 (20–30 min.)

From a customer perspective, simply lowering the mean delivery time without any

change in the variability does little to address customers’ concerns about certainty of

delivery dates. To see this, compute the mean and standard deviation before Six Sigma

9-48 (20-30 min.)

1. SpaceTel only 20X0 20X1

Customer lines 14,787,000 15,370,000

2. SpaceTel

with STL STL Only

3. The employees of the acquired company probably will not be able to

immediately achieve the level of productivity achieved by SpaceTel’s other

9-49 (20-30 min.)

1. The best productivity measure based on the physical measures given is: pounds

of laundry processed ÷ direct-labor-hours worked. Comparing 20X1 and 20X3:

2. The best productivity measure based on the financial measures given is: sales

revenue ÷ direct labor cost. Comparing 20X1 and 20X3, we get the following

sales per dollar of direct-labor cost:

20X1 20X3

3. This productivity measure mixes financial and physical measures. Therefore, it is

essential to adjust the financial portion for inflation. Expressing both 20X1 and

9-50 (30 min.) There are numerous approaches to this case. Here is one possible

solution. An alternative solution would be to try to increase the productivity of the

employees.

1 & 2. Rico Estrada is faced with difficult tradeoffs. His sub goal of retaining a skilled

20) = 7 excess employees unless this downturn in business is only temporary.

This excess employment is costing Estrada 7 × $3,000 = $21,000 per month

(ignoring taxes and fringe benefits). If Estrada could save this amount, he could

reduce the average cost per account as shown:

Number of accounts 680

396

Possible CDS Responses:

a. Maintain current markup of 25%:

Target cost $193.39 ÷ 1.25 = $154.71

Total cost 680 × $154.71 = $105,203

Required additional cost reduction $108,880 – $105,203 = $3,677

Additional employee reduction

required @ $3,000 each Approximately 1.2

b. Reduce markup to 15%:

Target cost $193.39 ÷ 1.15 = $168.17

Total cost 680 × $168.17 = $114,356

Required cost reduction None

To maintain the current 25% markup, Estrada would have to achieve a target cost

of $154.71, but that would entail further cost savings of $3,677. Laying off one

employee would save almost enough, and laying off two employees would save

more than enough. Estrada could avoid further layoffs by reducing his desired

markup, but then the business may not be as attractive to him.

9-51 (30-40 min.)

Answers will vary. At one point, the following quotations appeared on the companies’

Web sites. These quotes may have been replaced by the time this problem is assigned.

Nevertheless, it is very likely that each Web site will contain references to Six Sigma

because it is a central tenet to the operations in each of the four companies.

leverages leaders who will manage the efforts for rapid, sustainable, and

improved business results.”

GE – “Today’s competitive environment leaves no room for error. We must delight

our customers and relentlessly look for new ways to exceed their expectations. This is

why Six Sigma Quality has become a part of our culture.

meeting the required specifications. This means we need to be nearly flawless in

executing our key processes.

Key Concepts of Six Sigma

At its core, Six Sigma revolves around a few key concepts.

Critical to Quality: Attributes most important to the customer