Ethics and quality. Wainwright Corporation manufacturesauto parts for two leading Japanese automakers. Nancy Evans is themanagement accountant for one of Wainwrightâs largest manufacturingplants. The plantâs General Manager, Chris Sheldon, has justreturned from a meeting at corporate headquarters where qualityexpectations were outlined for 2012. Chris calls Nancy into hisoffice to relay the corporate quality objective that total qualitycosts will not exceed 10% of total revenues by plant under anycircumstances. Chris asks Nancy to provide him with a list ofoptions for meeting corporate headquarterâs quality objective. Theplantâs initial budgeted revenues and quality costs for 2012 are asfollows:
Revenueâ¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦3,400,000
Quality Costs:
Testing of purchasedmaterialsâ¦â¦â¦â¦â¦â¦â¦â¦.â¦.32,000
Quality control training for productionstaffâ¦â¦.â¦â¦.5,000
Warranty repairsâ¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦.â¦...82,000
Quality designengineeringâ¦â¦â¦â¦â¦â¦â¦â¦â¦.â¦...48,000
Customer supportâ¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦.â¦â¦.37,000
Materials scrapâ¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦.â¦.12,000
Product inspectionâ¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦..102,000
Engineering redesign of failedpartsâ¦â¦â¦â¦.â¦â¦....21,000
Rework of failed partsâ¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦â¦..18,000
Prior to receiving the new corporate quality objective,Nancy had collected information for all of the plantâs possibleoptions for improving both product quality and costs of quality.She was planning to introduce the idea of reengineering themanufacturing process at a one-time cost of $75,000, which woulddecrease product inspection costs by approximately 25% per year andwas expected to reduce warranty repairs and customer support by anestimated 40% per year. After seeing the new corporate objective,Nancy is reconsidering the reengineering idea. Nancy returns to heroffice and crunches the numbers again to look for otheralternatives. She concludes that by increasing the cost of qualitycontrol training for production staff by $15,000 per year, thecompany would reduce inspection costs by 10% annually and reducewarranty repairs and customer support costs by 20% per year, aswell. She is leaning toward only presenting this latter option toChris, the general manager, since this is the only option thatmeets the new corporate quality objective.
1- Calculate the ratio of each costs-of-quality category(prevention, appraisal, internet failure, and external failure) torevenues for 2012. Are the total costs of quality as a percentageof revenues currently less than 10%?
2- Which of the two quality options should Nancy proposeto the general manager, Chris Sheldon? Show the two year outcomefor each option: (a) reengineer the manufacturing process for$75,000 and (b) increase quality training expenditure by $15,000per year.
3- Suppose Nancy decides not to present thereengineering option to Chris. Is Nancyâs action unethical?Explain.