SOLUTION
(25 min.) Costs of quality, quality improvements.
1. iCover’s managers plan to increase spending on design changes and process engineering
to improve product quality. These are prevention activities. iCover’s managers plan to increase
2. Cost of making quality improvements = $125,000 + $210,000 = $335,000
Benefits of quality improvements:
3. The following table shows the actual costs of quality at iCover, as a percentage of total
costs of quality, and as a percentage of revenues, before the change in the production process.
Note that sales revenues = $20 × 1,000,000 units = $20,000,000.
Description
(1)
Amount
(2)
Percentage of Total
Costs of Quality
(3) = (2) ÷ $1,610,000
Percentage of
Revenues (4) = (2) ÷
$20,000,000
Prevention costs $ 400,000 24.8% 2.00%
Appraisal costs 150,000 9.3% 0.75%
Internal failure costs
The following table shows the actual costs of quality at iCover, as a percentage of total
costs of quality, and as a percentage of revenues, after the change in the production process. Note
that as a result of these changes, lost sales from customer returns decrease by 70% × $650,000 =
$455,000, so sales revenues increase by the same amount. Sales revenues in this case =
$20,000,000 + $455,000 = $20,455,000
Description
(1)
Amount
(2)
Percentage of Total
Costs of Quality
(3) = (2) ÷
$1,543,000
Percentage
of Revenues
(4) = (2) ÷
$20,455,000
Prevention costs1$ 735,000 47.7% 3.6%
Appraisal costs 150,000 9.7% 0.7%
1Prevention costs = Existing prevention costs + costs of design changes costs + costs of process engineering improvements
As a result of implementing the changes in the production process, prevention costs,
which are 24.8% of the total costs of quality and 2% of revenues, will become 47.7% of the total
Improvements in the production process could also decrease rework costs resulting in
19-22 Quality improvement, relevant costs, relevant revenues. SpeedPrint manufactures and
sells 18,000 high-technology printing presses each year. The variable and fixed costs of rework
and repair are as follows:
SpeedPrint’s current presses have a quality problem that causes variations in the shade of some
colors. Its engineers suggest changing a key component in each press. The new component will
cost $70 more than the old one. In the next year, however, SpeedPrint expects that with the new
component it will (1) save 14,000 hours of rework, (2) save 850 hours of customer support, (3)
move 225 fewer loads, (4) save 8,000 hours of warranty repairs, and (5) sell an additional 140
printing presses, for a total contribution margin of $1,680,000. SpeedPrint believes that even as it
improves quality, it will not be able to save any of the fixed costs of rework or repair. SpeedPrint
uses a 1-year time horizon for this decision because it plans to introduce a new press at the end
of the year.
Required:
1. Should SpeedPrint change to the new component? Show your calculations.
2. Suppose the estimate of 140 additional printing presses sold is uncertain. What is the
minimum number of additional printing presses that SpeedPrint needs to sell to justify
adopting the new component?
3. What other factors should managers at SpeedPrint consider when making their decision about
changing to a new component?
SOLUTION
(25 min.) Quality improvement, relevant costs, and relevant revenues.
1. Relevant costs over the next year of changing to the new component
Relevant Benefits over
the Next Year of Choosing
the New Component
Costs of quality items
Savings in rework costs
$79 14,000 rework hours
Savings in customer-support costs
$1,106,000
Because the expected relevant benefits of $3,606,500 exceed the expected relevant costs of the
2. The incremental cost of the new component of $1,260,000 is less than the incremental
3. SpeedPrint should consider nonfinancial factors such as the reputation benefits of high
19-23 Quality improvement, relevant costs, relevant revenues. TidyCar washes vehicles
using a nohands approach. Business is good but Jonathan, the manager, has noticed that
customers complain because there are streaks on their vehicles at pickup. TidyCar warrants that
each vehicle will sparkle at delivery and charges $25 for each vehicle.
TidyCar washes 100 vehicles each day and last month, 40% of them required a hand
finish. Each hand wash costs $15.
Jonathan believes the problem can be eliminated by a prewash (costing $2 per vehicle)
and an equipment calibration at the start of each day, which will reduce the number of vehicles
washed each day by 10, but will decrease the vehicles requiring a hand finish from 40% to 10%.
Required:
1. Should TidyCar implement Jonathan’s idea? Show your calculations.
2. What nonfinancial and qualitative factors should TidyCar consider in deciding whether to
implement the new design?
SOLUTION
(20 min.) Quality improvement, relevant costs, relevant revenues.
1. Relevant revenues and relevant costs under the current method of washing cars
Relevant revenues and relevant costs under the modified method of washing cars
TidyCar should implement the modified method of washing cars because it would
increase TidyCar’s operating income.
2. TidyCar should consider other benefits of improving this quality problem. With fewer cars
Another consideration is employee morale. With fewer cars to hand wash, employees will
19-24 Waiting time. It’s a Dog’s World (IDW) makes toys for big breed puppies. IDW’s
managers have recently learned that they can calculate the average waiting time for an order
from the time an order is received till the time manufacturing starts. They have asked for your
help and have provided the following information.
Expected number of orders for the product: 3,200
Manufacturing time per order: 5 hours
Annual machine capacity in hours: 18,000
Required:
1. Calculate the average waiting time per order.
2. After learning about the average waiting time, IDW’s managers are confused. They do not
understand why, if annual machine capacity is greater than the average number of orders for
the product, there would be any waiting time at all. Write a memo to clarify the situation.
3. The managers have asked for your suggestions on what they can do to minimize or eliminate
waiting time. How would you respond?
SOLUTION
(25min.) Waiting time.
1.
2
=
Annual average Manufacturing
number of orders time per order
Average waiting time Annual machine Annual average Manufacturing
2
number of orders time per order
capacity
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=
( )
[ ]
2
3, 200 5
2 18,000 3,200 5
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=
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80,000
2 18,000 16,000´ –
= 20 hours
2. To: Management of It’s a Dog’s World (IDW)
Subject: Explanation of waiting times
Even though IDW expects to utilize only 16,000 hours of the 18,000 hours of capacity
(2) IDW may receive orders while it is processing other orders. For example, IDW may receive
three orders as soon as it starts processing an order. In this case, the first order would have to
The denominator in the formula is a measure of the unused capacity, or cushion. As the
Note that if the time it takes to process each order increases, the waiting times will also
increase because the numerator in the formula will increase and the denominator will decrease.
The manufacturing time per order appears as a squared term in the numerator. The squared term
3. Management can take a number of actions to reduce wait times.
a. Increase the annual capacity by purchasing another machine. This will, of course,
increase costs.
b. Work with customers to smooth the receipt of orders throughout the year or produce
for inventory rather than only when an order is received. This will increase inventory
holding costs.
c. Work with process engineering to reduce manufacturing time.
In each case, management would have to consider the benefits of reducing wait times
against the costs.
19-25 Waiting time, service industry. The registration advisors at a small Midwestern
university (SMU) help 4,200 students develop their class schedules and register for classes each
semester. Each advisor works for 10 hours a day during the registration period. SMU currently
has 10 advisors. While advising an individual student can take anywhere from 2 to 30 minutes, it
takes an average of 12 minutes per student. During the registration period, the 10 advisors see an
average of 300 students a day on a first-come, firstserved basis.
Required:
1. Using the formula on page 762, calculate how long the average student will have to wait in
the advisor’s office before being advised.
2. The head of the registration advisors would like to increase the number of students seen each
day because at 300 students a day it would take 14 working days to see all of the students.
This is a problem because the registration period lasts for only 2 weeks (10 working days). If
the advisors could advise 420 students a day, it would take only 2 weeks (10 days). However,
the head advisor wants to make sure that the waiting time is not excessive. What would be
the average waiting time if 420 students were seen each day?
3. SMU wants to know the effect of reducing the average advising time on the average wait
time. If SMU can reduce the average advising time to 10 minutes, what would be the average
waiting time if 420 students were seen each day?
SOLUTION
(30 min.) Waiting time, service industry.
1. If SMU’s advisors expect to see 300 students each day and it takes an average of 12 minutes to
=
( )
[ ]
2
300 12
2 10 advisors 10 hours 60 minutes 300 12
´
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ë û
=
[ ]
43,200
2 6,000 3,600´ –
= 9 minutes
2. At 420 students seen a day,
( )
( )
2
=
Average number Time taken to
advise a student
of students per day
Wait time Average amount
Maximum amount Time taken to
2
of time available advise a student
of students per day
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=
( )
[ ]
2
420 12
2 10 advisors 10 hours 60 minutes 420 12
´
é ù
´ ´ ´ – ´
ë û
=
[ ]
60,480 = 31.5 minutes
2 6,000 5,040´ –
3. If the average time to advise a student is reduced to 10 minutes, then the average wait time
would be
=
( )
( )
2
Average number Time taken to
advise a student
of students per day
Average amount
Maximum amount Time taken to
2
of time available advise a student
of students per day
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=
( )
[ ]
2
420 10
2 10 advisors 10 hours 60 minutes 420 10
´
é ù
´ ´ ´ – ´
ë û
=
[ ]
42,000 11.67 minutes
2 6, 000 4, 200 =
´ –
19-26 Waiting time, cost considerations, customer satisfaction. Refer to the information
presented in Exercise 19-25. The head of the registration advisors at SMU has decided that the
advisors must finish their advising in 2 weeks (10 working days) and therefore must advise 420
students a day. However, the average waiting time given a 12-minute advising period will result
in student complaints, as will reducing the average advising time to 10 minutes. SMU is
considering two alternatives:
a. Hire two more advisors for the 2-week (10-working day) advising period. This will increase
the available number of advisors to 12 and therefore lower the average waiting time.
b. Increase the number of days that the advisors will work during the 2-week registration period
to 6 days a week. If SMU increases the number of days worked to 6 per week, then the 10
advisors need only see 350 students a day to advise all of the students in 2 weeks.
Required:
1. What would the average wait time be under alternative A and under alternative B?
2. If advisors earn $100 per day, which alternative would be cheaper for SMU (assume that if
advisors work 6 days in a given workweek, they will be paid time and a half for the sixth
day)?
3. From a student satisfaction point of view, which of the two alternatives would be preferred?
Why?
SOLUTION
(25 min.) Waiting time, cost considerations, and customer satisfaction
(continued from 19-25).
1. a) If SMU hires two more advisors, then the average wait time will be
=
( )
( )
2
Average number Time taken to
advise a student
of students per day
Average amount
Maximum amount Time taken to
2
of time available advise a student
of students per day
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é ù
æ ö
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ç ÷
ê ú
ê ú
è ø
ë û
ë û
=
( )
[ ]
2
420 12
2 12 advisors 10 hours 60 minutes 420 12
´
é ù
´ ´ ´ – ´
ë û
=
[ ]
60,480 = 14 minutes
2 7, 200 5,040´ –
b) If SMU has its current employees work six days a week and has them advise 350
students a day, then the average wait time will be
=
( )
2
Average number Time taken to
advise a student
of students per day
Maximum amount Average amount Time taken to
2
of time available of students per day advise a student
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æ ö æ ö
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ë û
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=
( )
[ ]
2
350 12
2 10 advisors 10 hours 60 minutes 350 12
´
é ù
´ ´ ´ – ´
ë û
=
( )
[ ]
50,400 14 minutes
2 6,000 4, 200 =
´ –
2. a) Cost if SMU hires two extra advisors for the registration period:
b) Cost if SMU has its 10 advisors work six days a week for the registration period:
Alternative (a) is less costly for SMU.
3. Hiring two extra advisors has the same waiting time and a lower cost than extending the
workweek to six days during the registration period. However, the quality of the advising may
19-27 Nonfinancial measures of quality and time. For the past two years, Worldwide Cell
Phones (WCP) has been working to improve the quality of its phones. Data for 2016 and 2017
follows (in thousands of phones):
Required:
1. For each year, 2016 and 2017, calculate the following:
a. Percentage of defective units shipped
b. Customer complaints as a percentage of units shipped
c. Percentage of units reworked during production
d. Manufacturing cycle time as a percentage of total time from order to delivery
2. Referring to the information computed in requirement 1, explain whether WCP’s quality and
timeliness have improved.