19-39
SOLUTION
19-40
19-32 (60 min.) Waiting times, relevant revenues, and relevant costs
(continuation of 19-31).
Seawall is still debating whether it should introduce Y28. The following table provides
information on selling prices, variable costs, and inventory carrying costs for Z39 and Y28:
Using the average manufacturing cycle times calculated in Problem 19-31, requirement 2, should
Seawall manufacture and sell Y28? Show your calculations and briefly explain your reasoning.
SOLUTION
19-41
19-42
19-33 (40−45 min.) Manufacturing lead times, relevant revenues, and relevant costs.
The Brandt Corporation makes wire harnesses for the aircraft industry only upon receiving firm
orders from its customers. Brandt has recently purchased a new machine to make two types of
wire harnesses, one for Boeing airplanes (B7) and the other for Airbus Industries airplanes (A3).
The annual capacity of the new machine is 6,000 hours. The following information is available
for next year:
Required:
1. Calculate the average manufacturing cycle times per order (a) if Brandt manufactures only
B7 and (b) if Brandt manufactures both B7 and A3.
2. Even though A3 has a positive contribution margin, Brandt’s managers are evaluating
whether Brandt should (a) make and sell only B7 or (b) make and sell both B7 and A3.
Which alternative will maximize Brandt’s operating income? Show your calculations.
3. What other factors should Brandt consider in choosing between the alternatives in
requirement 2?
SOLUTION
19-43
19-44
19-45
19-46
19-34 (30–40 min.) Compensation linked with profitability, waiting time, and quality
measures.
Seashore Healthcare operates two medical groups, one in Philadelphia and one in Baltimore. The
semiannual bonus plan for each medical group’s president has three components:
a. Profitability performance. Add 1.50% of operating income.
b. Average patient waiting time. Add $30,000 if the average waiting time for a patient to see a
doctor after the scheduled appointment time is less than 15 minutes. If average patient
waiting time is more than 15 minutes, add nothing.
c. Patient satisfaction performance. Deduct $35,000 if patient satisfaction (measured using a
survey asking patients about their satisfaction with their doctor and their overall satisfaction
with Seashore Healthcare) falls below 65 on a scale from 0 (lowest) to 100 (highest). No
additional bonus is awarded for satisfaction scores of 65 or more.
Semiannual data for 2013 for the Philadelphia and Baltimore groups are as follows:
Required:
1. Compute the bonuses paid in each half year of 2013 to the Philadelphia and Baltimore
medical group presidents.
2. Discuss the validity of the components of the bonus plan as measures of profitability, waiting
time performance, and patient satisfaction. Suggest one shortcoming of each measure and
how it might be overcome (by redesign of the plan or by another measure).
3. Why do you think Seashore Healthcare includes measures of both operating income and
waiting time in its bonus plan for group presidents? Give one example of what might happen
if waiting time was dropped as a performance measure.
19-47
SOLUTION
19-48
19-49
19-35 (30–35 min.) Ethics and quality.
Weston Corporation manufactures auto parts for two leading Japanese automakers. Nancy Evans
is the management accountant for one of Weston’s largest manufacturing plants. The plant’s
general manager, Chris Sheldon, has just returned from a meeting at corporate headquarters
where quality expectations were outlined for 2014. Chris calls Nancy into his office to relay the
corporate quality objective that total quality costs will not exceed 10% of total revenues by plant
under any circumstances. Chris asks Nancy to provide him with a list of options for meeting
corporate headquarters’ quality objective. The plant’s initial budgeted revenues and quality costs
for 2014 are as follows:
Prior to receiving the new corporate quality objective, Nancy had collected information for all of
the plant’s possible options for improving both product quality and costs of quality. She was
planning to introduce the idea of reengineering the manufacturing process at a one-time cost of
$112,500, which would decrease product inspection costs by approximately 25% per year and
was expected to reduce warranty repairs and customer support by an estimated 40% per year.
After seeing the new corporate objective, Nancy is reconsidering the reengineering idea.
Nancy returns to her office and crunches the numbers again to look for other alternatives. She
concludes that by increasing the cost of quality control training for production staff by $22,500
per year, the company would reduce inspection costs by 10% annually and reduce warranty
repairs and customer support costs by 20% per year as well. She is leaning toward only
presenting this latter option to Chris because this is the only option that meets the new corporate
quality objective.
19-50
Required:
1. Calculate the ratio of each budgeted costs-of-quality category (prevention, appraisal, internal
failure, and external failure) to budgeted revenues for 2014. Are the budgeted total costs of
quality as a percentage of budgeted revenues currently less than 10%?
2. Which of the two quality options should Nancy propose to the general manager, Chris
Sheldon? Show the 2-year outcome for each option: (a) reengineer the manufacturing process
for $112,500 and (b) increase quality training expenditure by $22,500 per year.
3. Suppose Nancy decides not to present the reengineering option to Chris. Is Nancy’s action
unethical? Explain.
SOLUTION
19-51
19-52
19-53
19-36 (45–50 min.) Quality improvement, theory of constraints.
Winchester Corporation makes printed cloth in two departments: weaving and printing.
Currently, all product first moves through the weaving department and then through the printing
department before it is sold to retail distributors for $2,500 per roll. Winchester provides the
following information:
Winchester can start only 10,000 rolls of cloth in the weaving department because of capacity
constraints of the weaving machines. Of the 10,000 rolls of cloth started in the weaving
department, 500 (5%) defective rolls are scrapped at zero net disposal value. The good rolls from
the weaving department (called gray cloth) are sent to the printing department. Of the 9,500 good
rolls started at the printing operation, 950 (10%) defective rolls are scrapped at zero net disposal
value. The Winchester Corporation’s total monthly sales of printed cloth equal the printing
department’s output.
Required:
1. The printing department is considering buying 5,000 additional rolls of gray cloth from an
outside supplier at $1,800 per roll, which is much higher than Winchester’s cost to
manufacture the roll. The printing department expects that 10% of the rolls obtained from the
outside supplier will result in defective products. Should the printing department buy the gray
cloth from the outside supplier? Show your calculations.
2. Winchester’s engineers have developed a method that would lower the printing department’s
rate of defective products to 6% at the printing operation. Implementing the new method
would cost $700,000 per month. Should Winchester implement the change? Show your
calculations.
3. The design engineering team has proposed a modification that would lower the weaving
department’s rate of defective products to 3%. The modification would cost the company
$350,000 per month. Should Winchester implement the change? Show your calculations.
SOLUTION
19-54
19-55