Documente Academic
Documente Profesional
Documente Cultură
QUESTIONS
16-1 The American Heritage Dictionary defines quality as: 1. a characteristic or
attribute of something; property; a feature. 2. the natural or essential character of
something. 3. excellence; superiority.
From a managerial perspective, quality can be defined as the degree of
conformity between what a customer receives and what a customer is promised.
Alternatively, we can conceptualize quality as the total level of satisfaction
received by the customer.
For purposes of management accounting and control, quality can be broken
down into two components: design quality and performance quality. The former
refers to the extent to which the features (attributes or characteristics) of the
product or service are those desired by the customer. The latter refers to the
difference between the design specifications of the product and the actual
performance of the product. Chapter 16 deals primarily with the management
and control of performance quality failures.
16-2 Among factors that might have caused lapses in quality in some firms in the
United States were: (1) years of success, (2) lack of competition from foreign
companies and (3) absence of information regarding total spending on quality.
These and other factors contributed to a lack of awareness that the cost of
quality could be substantial and, more often than not, more than the cost of
manufacturing. Alternatively, minimizing the total quality-related costs could be
the source of competitive advantage for an organization.
16-3 Procter & Gamble defines TQM as the unyielding and continually improving
effort by everyone in an organization to understand, meet, and exceed the
expectations of customers. Typical characteristics of TQM include focusing on
satisfying customers, striving for continuous improvement, and involving the
entire workforce.
TQM is a continual effort and therefore never complete. Global competition, new
technologies, and ever-changing customer expectations make TQM a continual
effort for a successful firm.
16-4 The Malcolm Baldridge National Quality Award (www.quality.nist.gov) is an
annual award created by the U.S. government to recognize U.S. companies in
manufacturing, small business, service, education, and healthcare that excel in
quality achievement and quality management. ISO 9000 is a set of certification
guidelines for quality management and quality standards developed by the
International Organization for Standardization in Geneva, Switzerland
(www.iso.ch/welcome.html). To be ISO-9000 certified, a firm must document a
process to ensure quality related to the design, development, production, final
16-1
16-2
16-3
16-4
16-15 Some examples of costs associated with cost of quality (COQ) categories are:
Prevention Costs: Training costs such as instructors fees, purchase of training
equipment, tuition for external training, training wages and salaries; salaries for
quality planning, cost of preventive equipment, printing and promotion costs for
quality programs, application expenses in conjunction with awards for quality;
costs incurred to certify suppliers; research on customer needs; quality audits.
Appraisal Costs: Cost of inspecting raw materials, work-in-process, and
finished goods inventories; maintenance of test equipment; process control
monitoring; inspecting machines; field testing; using statistical process control.
Internal Failure Costs: Net cost of scrap, rework cost, loss due to downgrade of
product (opportunity cost), re-inspection costs, and loss due to work
interruptions.
External Failure Costs: handling of sales returns; customer complaint
resolution; sales allowances due to quality deficiency; warranty claims; product
liability lawsuits; service calls; product liability recalls; repair costs in the field;
cancelled sales orders due to quality deficiency; loss of sales and market share
due to customer ill-will and dissatisfaction.
16-16 Prevention costs rise during the early years of implementing TQM as the firm
engages in education to prepare its employees and in the planning and
promotion of the quality program. Appraisal costs will also likely rise during the
early years of TQM, because the firm needs to ensure that quality is actually
being achieved. The increase in appraisal cost, however, is most likely to occur
at a slower pace than those of the prevention costs because at the beginning of
a TQM program there will be substantial increases in quality training and in
promotion to raise awareness on the importance of quality.
The firm may see some decreases in internal and external failure costs in the
early years of implementing TQM. However, these two costs most likely will
remain at about the same level as before during the first several years of TQM.
Many firms may actually see internal failure cost rise, because of the higher
standard demanded by the TQM or the higher level of employees awareness on
the critical importance of perfection in every step of the process. As the firm
makes progress in TQM, both internal failure and external failure costs should
decrease.
16-17 Costs of conformance are costs incurred to ensure that products or services
meet quality standards and include prevention costs and appraisal costs.
Internal and external failure costs are costs of nonconformance. They are costs
incurred or opportunity costs because of poor-quality outputs (goods or
services).
16-5
16-18 Better prevention of poor quality often reduces all other costs of quality. With
fewer problems in quality, less appraisal is needed because the products are
made right the first time. Fewer defective units also reduce internal and external
failure costs as the occasion for repairs, rework, and recall decreases.
Thus, it is generally considered easier to design and build quality in than try to
inspect or repair quality in. Theoretically, if prevention efforts are completely
successful, there will be no need to incur appraisal costs and there will be no
internal failure or external failure costs. In practice, appraisal costs usually do
not decrease, partly because management needs to ensure that quality is there
as expected. Nonconformance costs, however, decrease at a much faster pace
than prevention costs increase.
16-19 A cost of quality (COQ) report describes quality cost items a firm incurred during
the reporting period. A COQ report can help users identify and recognize the
effects of their actions on quality costs and to pinpoint areas that need attention.
16-20 Tools for identifying and/or correcting quality problems include:
Control chartA graph that depicts successive observations taken at a constant
interval with the horizontal line representing time intervals, batch number, or
production run and the vertical line representing a measure of conformance to
the quality specification.
HistogramA graphical representation of the frequency of events or causes of
an indicated (i.e., identified) quality problem.
Pareto diagram (chart)A histogram of factors contributing to a quality problem,
ordered from the most to the least frequent.
Cause-and-effect (fishbone or Ishikawa) diagramA graph that consists of
spine, ribs, and bones. At the end of the horizontal spine is an indicated
(specified) quality problem. The spine itself connects causes to the effectthe
quality problem. Each branch or rib pointing into the spine describes a main
cause of the problem. Bones pointing to each rib are contributing factors to the
cause.
16-21 A cause-and-effect diagram is a graphical method to represent a chain of
causes and effects used to sort out root causes and identify relationships
between causes or between variables. Because of its shape, the diagram also is
called a fishbone diagram. Cause-and-effect diagrams can be used
diagnostically, in conjunction with control charts, to identify the principal causes
of an identified quality problem.
16-22 Typical main causes of quality problems in manufacturing operations are: 1)
machines, 2) materials, 3) methods, and 4) manpower.
16-6
16-23 A Pareto chart (diagram) is a vertical bar chart (graph) displaying the frequency
or the number of occurrences of each quality problem, ordered from the most to
the least frequent. As such, a Pareto chart can be used diagnostically to identify
the primary sources of quality problems and to help managers prioritize quality
improvement efforts.
16-24 Customer-response time (CRT) is defined as the amount of time between the
time a customer places an order and the time the order is received by the
customer. CRT can be broken down into three components: receipt time (lapse
of time between when a customer places an order and when that order is
received by manufacturing); manufacturing lead time (the amount of time
between when an order is received by manufacturing and when that order is
completedsee below); and, delivery time (lapse of time between when an
order is finished and when the customer receives that order).
Manufacturing lead (manufacturing cycle) time is defined as the lapse of time
between when an order is received by manufacturing and when that order is
completed. Thus, manufacturing lead time is equal to the sum of waiting time +
processing (manufacturing) time.
Cycle time efficiency (also known as throughput time ratio or process cycle
efficiency) is the ratio of time spent on value-added activities to the sum of time
spent on value-added and non-value-added activities; for example, cycle time
efficiency = processing time/(processing time + moving time + storage time +
inspection time).
16-25 As indicated by Exhibit 16.3 and the accompanying discussion in the chapter,
management accountants are involved extensively in the design and operation
of a comprehensive model (framework) for managing and controlling quality.
However, the key role played by management accountants, because of their
expertise in this regard, is the generation of relevant financial and nonfinancial
measures of quality. In terms of the former, accounting provides relevant cost
(and revenue) data that decision-makers can use to evaluate the desirability of
spending and investments in quality. (This role is compatible with the discussion
in Chapter 9 of the text.) As well, management accountants play a key role in
helping a cross-disciplinary team develop a COQ reporting systemthat is, a
comprehensive model, with subcategories, for capturing quality costs across the
value chain.
Also noted in Exhibit 16.3 is the use of nonfinancial quality indicators, both
internal and external (customer satisfaction measures). The management
accountant would typically be involved in the design of systems or processes
that would capture and report this information.
Finally, the management accountant can help in the design of two internal audit
functions associated with the comprehensive framework: one, the development
of quality audits (designed to ensure quality); two, the Control stage of Six
Sigma (where processes are put in place to monitor progress and to sustain the
gains associated with process improvements).
16-7
16-26
16-27 From a design standpoint, the following are likely desirable qualities (attributes)
of a COQ reporting system:
The system collects costs across the entire value chain, both internal and
external (so, for example, costs related to gathering consumer-preference
data and costs associated with certifying external suppliers would be
captured as part of the total cost of quality).
The system focuses on costing of activities (i.e., uses data obtained from an
ABC system).
The system includes both out-of-pocket and opportunity costs (the latter
occur within the performance failure category, i.e., either as an internal failure
or an external failure cost).
The system provides a breakdown of total quality-related costs according to
logical categories (such as prevention, appraisal, internal failure, and
external failure).
The system reports data in a time-series fashion (this would allow managers
to assess the financial effects of spending and investments in quality; it would
also allow managers to assess trade-offs between COQ categories over
time).
The system includes some baseline or appropriate benchmark (e.g., quality
costs could be reported as a percentage of sales or as a percentage of total
operating costs; benchmarks could include best-in-class performance,
either on an internal or an external basis).
16-28 In most cases, external failure costs (of the four categories) would be most
damaging to the organization. Some costs within this category (e.g., productliability lawsuits) can be huge in terms of out-of-pocket terms. Other costs in this
category relate to loss of reputation or market share associated with customer
dissatisfaction or ill-will. These costs are referred to as opportunity costs and
can also be huge in dollar terms.
16-8
16-29 As shown in Exhibit 16.1, investments in quality can lead to improved business
processes, which in turn result in improved quality of outputs (goods and
services). Improvement in quality of outputs reduces external failure costs (e.g.,
warranty expenses), reduces the amount of inventory, can lower total
manufacturing costs (e.g., inspection, rework, and inventory control costs). On
the revenue side, improvements in quality can result in an improved product
image of the company in the mind of consumers and faster throughput times.
These, in turn, can lead in the mind of the consumer to higher perceived value of
the organizations output, the financial consequence of which is higher selling
prices and increased market share. The combination of reduced costs and
increased revenues provides an increase in financial performance (e.g., ROI,
earnings per share, etc.).
16-30 High degree of process variation from target usually leads to variation in product
attributes, which are important contributors to the quality of a product. Significant
variation in process activities usually implies that there is an increased chance
that product attributes are below customer expectations. For this reason, the
Taguchi Loss Function is represented by a quadratic functionthe more the
departure from the target, the greater the assumed quality loss.
16-9
BRIEF EXERCISES
16-31
Total customer response time (CRT) = order receipt time + order wait time +
production processing (manufacturing) time + order delivery time = 10 days +
15 days + 20 days + 10 days = 55 days.
16-32
16-33
16-34
16-35
The estimated total quality loss (cost) using the Taguchi loss function is
calculated as follows:
L(78) = $20 (78 75)2
L(78) = $20 x 9 = $180
16-36
Average cost per unit, based on the Taguchi loss function, is:
EL(x) = k (2 + D2) = $20 (22 + 02) = $80
16-37
16-38
16-10
Manufacturing lead time (cycle time) is the elapsed time between when
Manufacturing Department receives an order (September 15, 2008) and when
actual manufacturing is completed (November 15, 2008). In this case,
manufacturing lead time is 2 months (8 weeks).
Manufacturing lead time (8 weeks) can be broken down into waiting time and
processing (manufacturing) time, as follows:
Delivery time = time lapse between when an order is finished (November 15,
2008) and when the order is received by the customer (December 1, 2008).
Here, delivery time = 2 weeks.
16-39
Correct answer is a (an increase in conformance costs resulted in a higherquality product, and therefore a decrease in nonconformance costs).
Conformance costs include prevention and appraisal costs; nonconformance
costs include failure costs (internal and external). In the present case,
conformance costs in total increased by 50% in total while total failure costs
decreased by $655 (i.e., $1,390 $735).
16-40
16-11
EXERCISES
16-41 Cost of Quality (COQ) ReportingMultiple-Choice (15 minutes)
1. d
2. c
3. b
4. e
5. b
6. d
7. b
8. c
16-13
One-Tailed
Area1
0.158655254
0.022750132
0.001349898
3.16712E-05 6.33425E-05
2.86652E-07
9.86588E-10 1.97318E-09
3
4
5
6
1
Two-Tailed
Area
0.317310508
0.045500264
0.002699796
63.34
5.73303E-07
0.00
Errors (Defects)
Per Million
317,310.51
45,500.26
2,699.80
0.57
The preceding data indicate suggest a common misconception regarding the quality
level assumed under Six Sigma. Only when a defect is defined as any deviation
from the targeted level of the attribute (i.e., only when the tolerance is zero) will
the above approach represent the maximum number of defects per million
opportunities for error. Note, for example, that the expected number of errors
(defects) under Six Sigma is approximately 2 per billion (when any deviation from
target is considered a defect).
In actual practice, based on initial experience by Motorola, the application of Six
Sigma allows some variation (drift) around the target value. That is, there is an
assumption that no process can be maintained in perfect control (i.e., no drift at
all). Thus, in practice, a drift of 1.5 standard deviations around the target value is
allowed. Any deviation beyond this allowable drift would be considered a defect
or out-of-control process.
What this means is that a revised formula is needed to calculate the defects per
million as the Six Sigma methodology is applied in practice. According to Pyxdek
(http://www.qualitydigest.com/may01/html/ sixsigma.html) the Excel formula (under
the assumption of an allowable drift of 1.5 sigma) is: 1000000*(1-NORMSDIST(Z1.5)), where 1.5 = allowable drift (in standard deviations) and Z = Sigma level. For Z
= 6.0, the Excel formula returns: 3.398, the defect-per-million figure commonly, but
perhaps mistakenly, reported in the literature. (Also see, J. R. Evans and W. M.
Lindsay, The Management and Control of Quality, 6th ed. (South-Western, 2005),
Chapter 10.
16-14
Peer Assessment Score (25%)In the fall of 2005, business school deans and
directors of accredited master's programs in business were asked to rate
programs on a scale from "marginal" (1) to "outstanding" (5). Those individuals
who did not know enough about a school to evaluate it fairly were asked to mark
"don't know." A school's score is the average of all the respondents who rated it.
Responses of "don't know" counted neither for nor against a school. About 50
percent of those surveyed responded.
Mean Starting Salary and Bonus (14%)The average starting salary and
bonus of 2005 graduates of a full-time master's program in business. Salary
figures are based on the number of graduates that reported data. The mean
signing bonus is weighted by the proportion of those graduates that reported a
bonus, since not everyone who reported a base salary figure reported a signing
bonus.
16-15
16-43 (Continued)
available are excluded. If the proportions of graduates for whom no job-seeking
information is available and who are not seeking jobs are high, then the
information
is not used in calculating the rankings. Employment rates at graduation (0.07)
and
three months after graduation (0.14) are used in the ranking model.
Student Selectivity (weight = 25%):
Overall Program Rank: Data were standardized about their means, and
standardized scores were weighted, totaled, and rescaled so that the top school
received a score of 100; others received their percentage of the top score.
Source: U.S. News & World Report, April 10, 2006 (or, http://www.usnews.com/usnews/
edu/grad/rankings/about/07biz_meth_brief.php, accessed on April 4, 2006).
16-16
16-17
16-44 (Continued)
Diversity: Is there diversity of faculty background? To what extent does a diverse
student body exist?
Placement: What firms and organizations regularly recruit graduates of the
business school?
Alumni: How active are alumni in terms of providing financial support and
placement opportunities (i.e., internships and full-time jobs) for graduates? Does the
school have an active business advisory board/council? In what other ways are
alumni involved in the business school?
Characteristics of Entering Students: What are the average SAT scores and high
school ranks of the most recent entering class of freshmen?
Faculty Qualifications: From what institutions did faculty earn their terminal
degrees? What proportion of faculty is considered full-time? What percentage of
faculty have recent relevant professional experience? To what extent are faculty
actively engaged in the profession?
Source: The preceding listing of quality criteria is drawn from M. R. Blood, Spotting
Quality, Decision Line, Vol. 36, No. 4 (July 2005), pp. 1420.
16-18
16-19
16-20
16-21
16-46 (Continued)
The Control Stagein a sense, the most important control-related decision
occurred at the beginning of the project: selection of the CFO as the project
champion (process owner). After the project had been completed, the team kept its
measurement system in place so schedule-preparation times could be monitored on
an on-going basis. The team also documented for future staff members new process
procedures.
Source: P. C. Brewer and J. E. Eighme, Using Six Sigma to Improve the Finance
Function, Strategic Finance (May 2005), pp. 2733.
16-22
16-23
16-47 (Continued)
3. There are likely opposing points of view. Companies that are included in
portfolios of high performance in the environmental (or social) area are certainly
likely to favor such disclosures. Stockholders (and potential investors) may favor
such disclosures, particularly since the external failure costs that some
companies face can have devastating effects on the ability of an organization to
be a going concern. That is, investors may value the disclosure of environmental
performance data as part of their risk-management objectives. As well,
companies that are performing well in terms of environmental performance are
likely to favor such disclosures to the investing public.
On the negative side, there is a likely bias: unless all companies would be
required to disclose such information, it might be difficult to benchmark
environmental performance. Also, it may be difficult (or even impossible) to
achieve standardization, which may reduce the informativeness of such
disclosures. Finally, some companies may oppose the disclosure of this
information for competitive reasons (that is, the disclosure of such information
might be used strategically by the companys competitors).
16-24
Prevention Costs:
Employee training
Product design
Supplier certification
Detection Costs:
Process inspection
Internal Failure Costs:
Depreciationpollutioncontrol equipment
Maintaining pollutioncontrol equipment
External Failure Costs:
Lake clean-up
Land restoration
Property-damage claim
Totals
Amounts
Subtotals
% of Total
Operating
Cost
$100,000
$140,000
$40,000
$280,000
2.8%
$320,000
3.2%
$600,000
6.0%
$1,800,000
$3,000,000
18.0%
30.0%
$400,000
$200,000
$500,000
$700,000
$600,000
2. With only a single year of data, it is difficult to draw any meaningful conclusions.
However, a tentative conclusion is that the company may be spending far too
little in the conformance quality area (i.e., Prevention and Detection Costs) and,
as a consequence, is incurring significant failure costs in the environmental
area.
3. Some qualities (attributes) of an effective (good) environmental quality cost
system:
Collect environmental quality-cost data from across the value chain (i.e., the
scope of data collection should be broad).
If possible, utilize activity-based cost (ABC) data, which could be used to
motivate (a) the elimination of non-value-added activities, and (b) improved
efficiency in the conduct of value-added activities.
Baseline data: environmental cost data should be compared to one or more
relevant benchmarks (sales, best-in-class performance, etc.).
Time-series results (data from a single time period are not likely to be very
informative and, in fact, can be misleading; the provision of time-series data
will inform management as to the success in reducing total spending in the
environmental cost area and trade-offs between categories).
16-25
16-49
The purpose of this exercise is to get students to think about the process of
developing nonfinancial quality indicators, based on specified Environmental
Objectives (five in the present case). The purpose of these indicators is to gauge
progress in accomplishing the specified Environmental Objectives and, as such, to
motivate improved quality in environmental performance. The following answers are
suggestive only:
Minimize Hazardous Materials:
Types and quantities of hazardous materials produced (in total,
and per unit of output)
Hazardous materials as a percentage of total materials cost
Productivity measures (ratio of hazardous outputs to inputs)
Minimize Raw Materials Usage:
Types and quantities of virgin (i.e., non-recycled) materials used (in total,
and per unit of output)
Productivity measures (e.g., ratio of outputs to virgin/raw materials
consumed)
Minimize Energy Requirements:
Types and quantities of energy consumed
Productivity measures (energy consumption per unit produced, etc.)
Minimize Release of Residues into the Environment:
Pounds of toxic waste produced
Cubic metric tons of effluents
Tons of greenhouse gases produced
Percent reduction in materials used for packing product
Maximize Opportunities to Recycle:
Pounds (or tons) of material recycled
Percentage of units of output that had to be remanufactured
Power (energy) produced from incineration
16-26
16-49 (Continued-1)
The instructor might want to use some of the following example disclosures from First
Energy Corporation (www.firstenergycorp.com/environment) for illustrative purposes:
Environmental Characteristics Associated with Various
Sources of Power Generation
Biomass Power
Coal Power
Hydro Power
Natural Gas Power
Nuclear Power
Oil Power
Other Sources
Solar Power
Unknown Purchased Resources
Wind Power
16-27
16-49 (Continued-2)
Radioactive Waste Produced:
Projected vs. Actual, 2004 & 2005
2004
Projected
Actual
Quantity
Quantity
2005
Projected
Actual
Quantity Quantity
Measure
High-Level
Radioactive
Waste
0.0036
0.0018
0.0040
0.0018
Low-Level
Radioactive
Waste
0.0001
<0.0001
0.0001
Lbs./1,000 kWh
Source: www.firstengergycorp.com/environment
16-28
Revenues
Maximum
Profit
Level
Costs
16-29
16-50 (Continued-1)
Diminishing-Returns Conceptualization
Cost of
Quality
Total
Cost of
Quality
Failure
Costs
Prevention &
Appraisal Costs
Zero
Quality
Optimum Quality
Level
Maximum
Quality
Quality
Level
16-30
16-50 (Continued-2)
Diminishing Returns Conceptualization: Trading Off Costs and
Benefits for Spending on Quality
Revenues
& Costs
Total
Costs
Total
Revenue
s
Maximum
Profit
Optimum
Quality Level
Quality
Level
16-31
16-51
(1)
(2)
(3)
(4)
(5)
(6)
Pareto Charts (Diagrams) can be used for diagnostic control purposes, that is,
to identify the primary causes of an identified quality problem (such as
absenteeism) and, as such, to identify possible solutions to the problem. These
charts are named after the Italian economist Wilfredo Pareto; they provide a
prioritization of causes of an indicated quality problem, based on frequency of
occurrence. Thus, they focus attention on causes that could offer the greatest
potential for improving quality. A loose interpretation of the information contained
in Pareto charts is that a relatively small number (e.g., 20%) of causes represent
a majority (e.g., 80%) of reasons for the quality failure (here, absenteeism).
16-32
2008
16-33
Total cost of
quality
2007
16-52 (continued)
2. Cost of Quality (COQ) as Percentage of Costs of Goods Sold (CGS):
Prevention Costs
Appraisal Costs
Internal Failure Costs
External Failure Costs
Total Cost of Quality
2009
2.0%
1.5%
14.0%
12.0%
29.5%
2008
2007
4.0%
2.5%
23.0%
18.0%
47.5%
1.0%
3.0%
27.0%
31.0%
62.0%
Prevention costs increased, then decreased, over the past three years.
Appraisal costs decreased steadily over the years.
Total failure costs, as well as internal and external components, decreased over
the years.
Total COQ as a percentage of CGS decreased from 62.0 percent to 29.5
percent.
3.
The company can probably expect its total cost of quality to continue declining
provided it maintains adequate level of quality training and other efforts to prevent
poor quality from occurring and to continue emphasis on the importance of quality.
The company was able to see the results within one year of increased efforts in
prevention. The company increased its spending on prevention costs fourfold from
2007 to 2008 and both internal and external failure costs decreased in the same
year and continued into 2009. However, the company reduced its spending on
prevention costs in 2009 to only half of the level the year before; therefore, it may
need to monitor closely the internal failure and external failure costs in 2010. It will
be a good investment to increase prevention costs if the failure costs start to climb
in 2010.
16-34
16-35
16-54
16-36
$20,000
5,000
$25,000
$75,000
45,000
30,000
($5,000)
3. As indicated in Exhibit 16.3 and the accompanying text discussion, the management
accountant plays a pervasive role in a comprehensive quality management and
control system. Fundamentally, the management accountant is involved in
generating relevant financial and nonfinancial quality-related data. Such data are
used by managers for decision-making purposes (as in this exercise) and for
controlling quality-related costs.
16-37
$80,000 x 3 =
100,000
Total cost
Savings from reduced errors =
$240,000
$340,000
$600,000 x 90% =
540,000
$200,000
16-38
Quality Loss
L(x)
80
Probability
f(x)
0.02
Expected
Loss
1.60
0.1997
45
0.05
2.25
0.1998
20
0.12
2.40
0.1999
0.11
0.55
0.2000
0.45
0.00
0.2001
0.10
0.50
0.2002
20
0.08
1.60
0.2003
45
0.05
2.25
0.2004
80
0.02
1.60
$12.75
3. Expected Loss Using Variance Data (see table below), per Albrecht and Roth,
The Measurement of Quality Costs: An Alternative Paradigm, Accounting
Horizons (June 1992), pp. 1527:
a. D2 = (0.199991 0.2)2, where 0.20 = target value and 0.199991 = x (bar)
= mean value of the quality characteristic
= 0.000000000081
b. Expected loss = k (2 + D2)
=
$500,000,000 x
(0.000000025419 +
0.000000000081)
= $12.75
16-39
16-57 (Continued)
Probability, f(x)
x*f(x)
(x 0.199991)2f(x)
0.1996
0.02
0.003992
0.00000000305762
0.1997
0.05
0.009985
0.00000000423405
0.1998
0.12
0.023976
0.00000000437772
0.1999
0.11
0.021989
0.00000000091091
0.2000
0.45
0.090000
0.00000000003645
0.2001
0.10
0.020010
0.00000000118810
0.2002
0.08
0.016016
0.00000000349448
0.2003
0.05
0.010015
0.00000000477405
0.2004
0.02
0.004008
0.00000000334562
0.199991
0.00000002541900
x (bar) =
16-40
16-41
Current
Situation
After
JIT
$1,350,000
$1,650,000
405,000
297,000
378,000
162,000
18,000
$90,000
330,000
247,500
165,000
82,500
3,000
$822,000
$300,000
(75,000)
(49,500)
(213,000)
(79,500)
(15,000)
$732,000
Note to Instructor: An Excel spreadsheet solution file for this exercise is embedded
in this document. You can open the spreadsheet object that follows by doing the
following:
1. Right click anywhere in the worksheet area below.
2. Select worksheet object and then select Open.
3. To return to the Word document, select File and then Close and return
to... while you are in the spreadsheet mode. The screen should then return
you to the Word document.
16-42
$150,000
x 0.12
$18,000
16-43
2. The target cycle time is 14.0 minutes; the lower control limit is 12.0 minutes and
the upper control limit is 16.0 minutes. As indicated in the accompanying Excel
file, the mean of the 12 weekly observations is 15.2, while the sample standard
deviation is 3.6 minutes (which seems high).
Note: An Excel spreadsheet solution file for this exercise is embedded in this
document. You can open the spreadsheet object that follows by doing the
following:
1. Right click anywhere in the worksheet area below.
2. Select worksheet object and then select Open.
3. To return to the Word document, select File and then Close and return to...
while you are in the spreadsheet mode. The screen should then return you to
the Word document.
16-44
16-61 (Continued)
3. As indicated in part (2), the mean of the sample observations (15.2) is not that far
from the target value (14.0). However, inspection of the control chart suggests
wide variability in the process, which is confirmed by the sample standard
deviation of the 12 observations around the mean value of the dataset. As well, we
note that six of the 12 observations lie outside of the control limits (4 exceed the
upper control limit, while 2 are below the lower control limit). The control of
process variability is one of the key goals of quality improvement. It may be the
case that the underlying process in this case needs to be investigated in order to
determine why there seems to be so much variability in weekly cycle times.
Perhaps some type of intervention/correction is warranted.
4. Management can determine the upper and lower control limits on their control
charts through experience (e.g., trial and error) or through the use of statistical
procedures. When these control limits are determined statistically (based on
process variability, measured either by standard deviations or on the range of
observations over time), the control chart is referred to as a statistical control
chart. Thus, the principal difference between the two types of charts is the method
used to construct the control limits.
16-45
Appraisal
Internal
Failure
External
Failure
x
x
x
16-46
Prevention
Appraisal
Internal
Failure
a. Warranty repairs
External
Failure
x
b. Scrap (net)
to blemish
sales
management courses
f. Raw materials inspections
g. Work-in-process inspection
x
x
environmental litigation
k. Inspection of reworked
products
rework
m. Machine maintenance
16-47
Prevention
Appraisal
Internal
Failure
$6,000
External
Failure
$15,000
$9,000
12,000
12,000
5,000
$18,000
9,000
15,000
7,000
18,000
10,000
9,000
5,000
1,000
$25,000
$48,000
$42,000
$51,000
3. The company is currently spending the least on preventive costs. They should
concentrate their efforts on preventive costs because they prevent poor quality
products from being manufactured. Such failure costs (internal + external) are
generally far more costly to the organization. Therefore, by increasing the amount
spent on prevention, management should be able to reduce spending on the other
cost of quality categories.
4. There are a number of possible improvements to the COQ reporting framework
illustrated above:
It is not clear from the sample report above whether the company takes a valuechain approach to collecting COQ data; that is, in theory COQ data should be
collected from across the entire value chain of activities, both internal and
external (another way to put this is that it is not clear from the report whether a
comprehensive framework is being used to collect COQ data for the
organization)
16-48
16-64 (Continued)
16-49
2007
Amount
% of
Sales
$15,000
2.83%
$20
10
40
150
$220
1.47%
2.16%
300
160
225
60
210
$955
6.37%
2.88%
500
240
190
$930
6.20%
3.04%
700
250
70
360
$1,380
9.20%
$2,045 10.91%
$3,485
23.23%
16-50
16-65 (Continued)
3. From 2007 to 2008, Duncans total cost of quality (COQ) has decreased from
23% of sales to 11% of sales. Part of the decrease in COQ as a percentage of
sales is the higher sales in 2008 compared to 2007. However, even without the
sales increase, the total COQ has decreased, both in absolute and relative
amount ($2,045/2007 sales of $15,000 = 13.6%).
Duncan increased spending in 2008 on prevention (241% of 2007 amount). As
a result, each of the other three categories of COQ (viz., appraisal, internal
failure, and external failure) decreased in 2008, in both absolute dollars and as
a percentage of sales dollars.
4.
To complement the COQ data, the company may want to collect both internal
and external nonfinancial measures of quality, such as the following:
Internal Measures of Quality
The number of defects per period
Process yield (ratio of good output to total output)
Percentage first-pass yield
The percentage of defective units shipped to customers to total units of
products shipped
Throughput (or, throughput efficiency)
External Measures of Quality
The number of customer complaints
Difference between delivery date and date requested by the customer
On-time delivery percentage (total units shipped on or before the scheduled
date to the total units shipped)
Surveys of customer satisfaction
5.
16-51
Sales
Cost of Quality
Prevention Cost
Preventive equipment maintenance
Vendor certification
Training of factory workers
Product design engineering
Total prevention costs
Appraisal Cost
Materials inspection
Production inspection
Finished product inspection
Product testing equipment
maintenance
Product testing labor
Total appraisal costs
Internal Failure Cost
Scrap
Rework before shipment
Emergency repair and maintenance
Total internal failure costs
External Failure Cost
Warranty repair
Direct costs of returned goods
Field Repairs
Product liability settlement
Total external failure costs
Total cost of quality
$60
60
140
270
$530
2.83%
$20
10
40
150
$220
1.47%
60
125
70
300
160
225
60
90
$405
2.16%
60
210
$955
6.37%
2.88%
500
240
190
$930
6.20%
400
80
30
60
$570
3.04%
700
250
70
360
$1,380
9.20%
$2,045
10.91%
$3,485
23.23%
300
180
60
$540
16-52
16-66 (Continued-1)
5. Data for Trend Analysis (2008 and 2007 Category Results)
Duncan Materials Company
Cost of Quality (COQ)Trend Analysis
2008 and 2007
2008
2007
Prevention costs
2.83%
1.47%
Appraisal costs
2.16%
6.37%
Internal failure costs
2.88%
6.20%
External failure costs
3.04%
9.20%
Total cost of quality
10.91% 23.23%
16-53
16-66 (Continued-2)
7. Sensitivity Analysis
Duncan Materials Company
Cost of Quality (COQ) Report
Sensitivity Analysis
Sales
Prevention costs
Appraisal costs
Internal Failure Cost
External Failure Cost
Total COQ
Notes:
1
1.05 x $18,750
2
1.06 x $530
2008
Cost as a
Amount
% of Sales
$18,750
$530
2.83%
405
2.16%
540
2.88%
570
3.04%
$2,045
10.91%
2008Revised
Cost as a
Amount
% of Sales
$19,6881
$5622
2.85%
405
2.06%
2163
1.10%
4
285
1.45%
$1,468
7.46%
0.40 x $540
0.50 x $570
3
4
Note: An Excel spreadsheet solution file for this Problem is embedded in this
document. You can open the spreadsheet object that follows by doing the
following:
1. Right click anywhere in the worksheet area below.
2. Select worksheet object and then select Open.
3. To return to the Word document, select File and then Close and return to...
while you are in the spreadsheet mode. The screen should then return you to
the Word document.
16-54
$ 40,000
300,000
$340,000
Appraisal costs:
Testing
$80,000
80,000
2008
Dollar
2007
%
Dollar
5.67
$ 50,000
270,000
$320,000
5.33
1.33
$60,000
60,000
1.00
$200,000
$250,000
50,000
90,000
90,000
340,000
5.67
85,000
425,000
7.08
$360,000
230,000
590,000
9.83
$500,000
350,000
850,000
14.17
$1,350,000
22.50
$1,655,000
27.58
16-55
16-67 (Continued)
There were slight increases in both prevention and appraisal costs from 2007
to 2008. The share of sales dollars consumed by each of these two
categories also increased slightly (0.33 percentage points). These two costs
increased by $40,000 over the two years.
Both internal failure costs and external failure costs decreased substantially
in 2008 as compared to those in 2007. The company experienced a 1.41
percent decrease in internal failure and a 4.34 percent decrease in external
failure costs, which together provided a total savings of $345,000. The
savings was 863 (345,000/40,000) percent of the increase in the sum of
conformance costs (prevention plus appraisal cost).
16-57
16-58
16-68 (Continued)
3.
In accordance with the IMA Standards, the first alternative (seeking the advice of
her boss) is appropriate. To resolve an ethical conflict, the IMA Standards specify
that the first step is to discuss the problem with the individuals immediate
supervisor, unless it appears that the supervisor is involved in the conflict. In this
case, it does not appear that Williams boss is involved.
Communication of confidential information to anyone outside the company is
inappropriate, unless there is a legal obligation to do so, in which case Williams
should contact the appropriate authorities.
Contacting a member of the Board of Directors would be inappropriate at this
stage. Basically, the IMA Standards specify that Williams should report the
conflict to successively higher levels within the organization and turn only to the
Board of Directors if the problem is not resolved at lower levels.
4.
Jan Williams should follow the established policy of the organization bearing on
the resolution of such conflict. If these policies do not resolve the ethical conflict,
Williams should report the problem to successively higher levels of
management, up to the Board of Directors, until it is satisfactorily resolved.
There is no requirement for Williams to inform her superior of this action
because there is credible evidence that the supervisor is involved in the conflict.
If the conflict is not resolved after exhausting all courses of internal review,
Williams may have no other recourse but to resign from the organization and to
submit an informative memo to an appropriate member of the organization.
16-59
2007
PREVENTION COSTS
Systems development
Quality engineering
Total
$ 680
1,650
$2,330
$ 120
1,080
$1,200
+ 467
+ 53
+ 94
APPRAISAL COSTS
Inspection
Statistical process control (SPC)
Supplies used in testing
Cost of testing equipment
Total
$2,770
270
40
390
$3,470
$1,700
30
270
$2,000
+ 63
N/A
+ 33
+ 44
+ 74
$1,100
1,300
1,600
$4,000
$ 600
800
1,400
$2,800
+
+
+
+
83
63
14
43
600
2,800
200
$ 3,600
$ 3,500
3,300
3,200
$10,000
83
15
94
64
$13,400
$16,000
16
% Change
2.
12000
10000
8000
6000
4000
2000
0
Prevention
Appraisal
Internal
Failure
2008
External
Failure
2007
16-60
16-69 (Continued)
3.
The firm increased spending on prevention and appraisal and saw its external
failure cost decrease by 64%. Although the internal failure costs increased from
2007 to 2008, the efforts to improve quality had begun to pay off as indicated by
a decrease of $2,600 (16%) in total quality cost from 2007 to 2008.
The most significant decreases in external failure costs were in costs for product
recalls and customer returns of defective goods. These two costs accounted for
42 percent of the total COQ in 2007. Decreases in these two cost categories in
2008 led to the decrease in the overall COQ. Customers were apparently more
satisfied with the product in 2008 than the year before.
4. No. The company has just started to improve its quality and increase
customer satisfaction. A cut in quality cost will likely jeopardize the improvements
in quality the company has achieved so far. Furthermore, the cut may cast doubt
on the dedication of the company to quality improvements. Continuing the efforts
to improve quality will eventually reduce the total cost of manufacturing and
selling the product, as the company witnessed in 2008. The company most likely
will enjoy increases in sales in the long run as its customers realize the high
product quality of the companys products.
16-61
16-70
1.
2007
% Change
PREVENTION COSTS
Systems development
Quality engineering
Total
$106
80
$186
$64
56
$120
+ 66
+ 43
+ 55
APPRAISAL COSTS
Inspection
Product testing
Statistical process control (SPC)
Supplies used in testing
Depreciation of testing equipment
Total
$120
160
74
6
34
$394
$ 76
98
4
22
$200
+ 58
+ 63
N/A
+ 50
+ 55
+ 97
$ 76
124
200
$400
$ 54
86
140
$280
+
+
+
+
41
44
43
43
$ 82
140
18
120
$ 360
$ 340
420
60
180
$1,000
76
67
70
33
64
$1,340
$1,600
16
16-62
16-70 (Continued-1)
2.
3. The report indicates that prevention, appraisal, and internal failure costs have
increased from 2007 to 2008. The external failure cost category decreased by 64%. It is
likely that the intensive efforts to improve quality has begun to pay off as, indicated by a
decrease of 16% in total COQ, from 2007 to 2008.
Lee Enterprises benefits from decreases in its external failure costs. Three external
failure costs (product recalls, warranty repairs, and warranty replacements) have
decreased by approximately 70 percent from what these costs were the year before.
The cost of field services decreased 33%. Some of the field services in 2008 were
likely for sales prior to the launching of the intensive quality-improvement effort. As
the company continues with its quality improvement program, field service costs
should continue to decrease.
4. One of the most effective ways for production workers to be conscientious in their
work is to hold them responsible for mistakes. Holding employees responsible for
their work can include a policy for workers to do rework on their own time and to pay
for costs incurred for rework. Lincoln Electric Company (Harvard Business School
case) has successfully implemented such a policy for years. However, Carrie Lee is
more likely to be successful in adopting this proposal if she can implement the new
procedure gradually over a period of two to three years. The firm also would need to
revise its compensation scheme to reflect the change.
16-63
16-70 (Continued-2)
Note: An Excel spreadsheet solution file for this Problem is embedded in this
document. You can open the spreadsheet object that follows by doing the
following:
1. Right click anywhere in the worksheet area below.
2. Select worksheet object and then select Open.
3. To return to the Word document, select File and then Close and return to...
while you are in the spreadsheet mode. The screen should then return you to
the Word document.
16-64
Abstain from engaging in or supporting any activity that might discredit the
profession.
16-65
16-71 (Continued)
The request by Sanchez is unethical because it would suppress information that
could influence an understanding of the results of operations by the company.
Also, by withholding information about the contingent liability, Sanchez is not
communicating information objectively.
2. Resolution of Ethical Conflictthe IMA Standards specify that when an individual
is faced with ethical issues, the individual should follow the policies established by
the organization to deal with (resolve) such conflicts. If these policies do not resolve
the ethical conflict, then the following courses of action are recommended:
The individual should discuss the issue with his/her immediate supervisor
(except when it appears that the supervisor is involved). In this regard, Stein
might want to write a report that provides details regarding the issue, including
the probable economic effects of the situation at hand. As well, she might want to
mention in the memo the request by Sanchez to suppress information regarding
the component failures.
If Stein is not able to achieve a satisfactory resolution of the matter, she should
submit the issue to the next management level. (Note: contact with levels above
the immediate supervisor should be initiated only with the knowledge of the
supervisor, assuming he or she is not involved. Normally, communication of such
problems to authorities or individuals not employed by the organization is not
considered appropriate, unless the employee believes there is a clear violation
of law.
Stein may then proceed to initiating a confidential discussion with an IMA Ethics
Counselor or other impartial advisor, in order to obtain a better understanding of
possible courses of action.
If, after exhausting all other options, the ethical conflict still exists, then Stein
may have no choice but to resign and to write an informative memorandum to
the appropriate organizational representative.
Finally, Stein may want to contact a qualified attorney to more fully determine her
legal obligations and rights concerning this ethical conflict.
16-66
$ 150,000
$ 40,000
36,300
41,250
117,550
($32,450)
The new scheduling and tracking system will most likely decrease the firms pre-tax
cash flow per year. Thus, from a purely financial point of view the company cannot
justify the purchase of the new system.
2. Among other factors the manager needs to consider are: reliability and accuracy of
the estimates, including contribution margins, cost of tracking misplaced and lost
items (and their behavior patterns), and the estimated decreases in misplaced and
lost items; sales growth; useful life of the new system; changes in technologies (how
soon will a newer system replace the new system); and, training cost, including
possible downtime, for the new system.
3. Cost to handle lost or misplaced items in the country in question:
Misplaced items:
5,000 x 12.0% x 0.8 x $60 =
Lost items:
5,000 x 3.0% x 0.8 x $300 =
Total cost of lost/misplaced items
Expected decrease
Maximum amount to pay for improvements
16-67
$28,800
36,000
$64,800
x
90%
$58,320
$12,000,000
3,000,000
$15,000,000
$ 2,400,000
1,125,000
600,000
150,000
5,775,000
$10,050,000
187,500
$ 9,862,500
x
3
$29,587,500
750,000
$28,837,500
Yes. The cost of the new process is $15,000,000 and the expected benefits total
$28,837,500 over three years. The pattern of pre-tax cash flows for this investment
opportunity is as follows:
Year 0 =
Year 1 =
Year 2 =
Year 3 =
($15,000,000)
$9,112,500
$9,862,500
$9,862,500
Thus, the payback period for this proposed investment is less than two years. Its
internal rate of return (IRR) is approximately 41%, as shown in the following screen
shot from Excel:
16-68
16-73 (Continued)
4. The following factors should be considered before making the final decision:
a. Accuracy of cost estimates, including:
contribution margin per unit
costs of current repair and rework
cost of repair with the new process
cost of the new process
b. Reliability of estimations of
rates of rework and repair
lost sales
amount of time before the current product become obsolete
c. Reaction of competitors
d. Time-value-of-money factor (discount rate) for capital budgeting decisionmaking
5.
The member of the board would be right if we ignore the financial payoff of the new
process and if the company is going to be in business for only three years. Having
high-quality products, especially for a high-end product such as the one the
company is selling, is crucial for a long-term success.
16-69
$150
b.
= k x (0.0025)2
k = $24,000,000
16-71
$200
b.
= k x (5.0)2
k = $8.00
16-72
Measured
Diameter (x)
1.232
1.240
1.250
1.258
1.262
1.270
1.272
1.273
1.274
1.275
1.276
1.277
1.280
1.288
1.292
1.292
1.294
1.298
1.300
1.304
1.320
Totals
Freq.
3
2
2
3
6
6
7
18
8
5
2
2
2
1
4
2
2
1
1
Prob.
f(x)
Loss Function
L(x)
0.0250
0.0375
0.0250
0.0250
0.0375
0.0750
0.0750
0.0875
0.2250
0.1000
0.0625
0.0250
0.0250
0.0250
0.0125
0.0500
0.0250
0.0250
0.0125
0.0125
1.0000
235.200
120.000
55.488
32.448
4.800
1.728
0.768
0.192
0
0.192
0.768
4.800
32.448
55.488
55.488
69.312
101.568
120.000
161.472
388.800
Weighted Loss
L(x) * f(x)
4.4376
5.8800
4.5000
1.3872
0.8112
0.1800
0.1296
0.0576
0.0168
0
0.0192
0.0480
0.1200
0.8112
1.3872
0.6936
3.4656
2.5392
3.0000
2.0184
4.8600
36.3624
16-73
Mean Diameter
x * f(x)
0.015400
0.031000
0.046875
0.031450
0.031550
0.047625
0.095400
0.095475
0.111475
0.286875
0.127600
0.079813
0.032000
0.032200
0.032300
0.016150
0.064700
0.032450
0.032500
0.016300
0.016500
1.2756375
(x xbar)2
f(x) *(x xbar)2
0.001904275
0.000023803
0.001270067
0.000031752
0.000657307
0.000024649
0.000311099
0.000007777
0.000185995
0.000004650
0.000031787
0.000001192
0.000013235
0.000000993
0.000006959
0.000000522
0.000002683
0.000000235
0.000000407
0.000000092
0.000000131
0.000000013
0.000001855
0.000000116
0.000019027
0.000000476
0.000152819
0.000003820
0.000267715
0.000006693
0.000267715
0.000003346
0.000337163
0.000016858
0.000500059
0.000012501
0.000593507
0.000014838
0.000804403
0.000010055
0.001967987
0.000024600
0.000188981
16-76 (Continued)
Mean actual diameter, X-bar = 1.275638
D2 = (1.275638 1.275000) 2 = 0.00000040640625
2 = 0.000188981
EL(x) = $192,000 x (0.000188981 + 0.00000040640625) = $36.36
2.
Allowed tolerance:
Repair Cost = k x (Tolerance) 2
$50 = $192,000 x (Tolerance) 2
Tolerance = 0.016 cm (i.e., specification = 1.291 to 1.259)
Alternative calculation for Tolerance, given Customer Tolerance, T 0:
Tolerance = T0 x (C1/C2) 1/2
= 0.025 cm x ($50/$120) 1/2
= 0.025 cm x 0.645497 = 0.016 cm
Note: An Excel spreadsheet solution file for this Problem is embedded in this
document. You can open the spreadsheet object that follows by doing the following:
1. Right click anywhere in the worksheet area below.
2. Select worksheet object and then select Open.
3. To return to the Word document, select File and then Close and return to...
while you are in the spreadsheet mode. The screen should then return you to the
Word document.
16-74
2.
BERGEN, INC
Quality Cost Report
Most Recent and Most-Distant Quarter
Quality
Cost Category
Prevention
6/30/2007
% of
Amount Quality
(In 000)
Cost
% of
Prod.
Cost
9/30/2008
% of
Amount Quality
(In 000) Cost
% of
Prod
Cost
$240
25
5.83
$270
46
5.99
Appraisal
205
21
4.98
116
20
2.57
Internal failure
188
20
4.56
102
17
2.26
External failure
331
34
8.03
103
17
2.28
$964
100
23.4
$591
100
13.1
Total COQ
From an analysis of the COQ Report (oldest vs. most recent quarterly results) it would
appear that Bergen Inc.'s program has been successful because:
Total COQ as a percentage of total production cost has declined from 23.4% to
13.1%.
External failure costs, those costs signaling customer dissatisfaction, have
declined from 8.03% of total production cost to 2.28%. These declines in
warranty repairs and customer returns should translate into increased sales and
lower costs (and therefore increased profitability) in the future.
The total internal failure cost was 4.56% of the total production cost in 2007, and
is now only 2.26% of the total production cost.
16-77 (Continued)
16-75
Sales and market share would continue to decline and then estimate the
revenue and income lost.
The company would have to compete on price rather than quality and calculate
the impact of having to lower product prices to do so.
5. This question is designed to make students think about a proper role of a COQ
reporting system as part of a comprehensive framework for managing and
controlling quality, such as the framework presented in Exhibit 16.3. The main point
is that COQ data can be a valuable attention-director. For example, many
organizations (confirmed by our own in-class discussions with MBA students) are
surprised to see how much spending (i.e., portion of each sales dollar) is consumed
by spending on quality. For many organizations, a reduction in overall quality costs
can be a key to significantly increasing financial performance (a point substantiated
by the empirical evidence referenced early in the chapter). Therefore, if COQ
reports are accessible, comprehensible, and viewed as reliable, they can inform
managers and operating personnel alike that quality failures can be exceedingly
expensive to the organization.
However, COQ measures are not diagnostic in nature. That is, these financial
measures do not point to ways to eliminate quality problems; however, it does
quantify in financial terms the impact of these failures on profitability. In short,
diagnostic control of quality is probably better achieved through the application of
techniques borrowed from operations management (cause-and-effect diagrams,
Pareto charts, etc.) applied to nonfinancial measures of quality. This suggests,
therefore, that one characteristic of a comprehensive framework for managing and
controlling quality is the use of both financial and nonfinancial quality indicators.
16-76
Annual cost
16-77
16-78 (Continued)
2. The sample size that Ross Webster should select from a lot of 800 housings is 265
units, calculated as follows:
nc = (2.00)2 (0.01) (0.99)
(0.01) 2
= 0.0396 0.0001
= 396
nf
3.
rate (3/240). Thus, this lot should be rejected as the error rate exceeds
one percent, the acceptable rate.
16-78
16-79
$200,000
$250,000
$266,667
=
=
=
=
$104,000
$130,000
$130,000
$364,000
=
=
=
$352,667
x 15%
$52,900
$1,500,000
= $712,900
4. Based solely on the short-term financial effect, ABC should replace the
equipment and move to JIT. The annual pre-tax net benefit ($712,900)
greatly exceeds the one-time penalty the company would have to pay to
break its existing lease.
5. Additional considerations:
16-80