Ch19 Qality Time and the Theory of Constraints Test.docx

CHAPTER 19: QUALITY, TIME, AND THE THEORY OF CONSTRAINTS TRUE/FALSE 1. Shortening delivery times is a minor part of the quality improvement process. Answer: False Shortening delivery times is a major part of the quality improvement process. 2. ISO 9000 developed by the International Organization for Standardization is a set of five international standards for quality management adopted by more than 85 countries. Answer: True 3. Quality of design measures how closely the characteristics of products or services meet the needs and wants of customers. Answer: True 4. In the banking industry, depositing a customer's check into the wrong bank account is an example of quality of design failure. Answer: False This is an example of conformance quality failure. 5. Costs of quality (COQ) reports usually do not consider opportunity costs. Answer: True 6. A control chart identifies potential causes of failures or defects. Answer: False This is a definition of a Pareto diagram. 7. A cause-and-effect diagram is used to help identify potential causes of defects. Answer: True 8. Allocated cost amounts are an important determinant of the costs of a quality improvement program. Answer: False Allocated costs are usually ignored in calculating the costs of a quality improvement program. 9. Most companies expend a substantial amount of dollars measuring the financial costs of design quality. Answer: False Most companies do not expend a substantial amount of dollars measuring the financial costs of design quality. 10. The number of defects shipped to customers as a percentage of total units shipped are a type of nonfinancial quality measure. Answer: True 11. Process yield is the ratio of defective units to total output. Answer: False Process yield is the ratio of good output to total output. 12. The financial cost of quality measures serves as a common denominator for evaluating trade-offs among prevention costs and failure costs. Answer: True 13. Nonfinancial measures of quality are often easy to quantify and easy to understand. Answer: True 14. Two common operational measures of time are customer-response time and manufacturing lead time. Answer: False The two are customer-response time and on-time performance. 15. Manufacturing lead time is the sum of waiting time and manufacturing time for an order. Answer: True 16. Two important drivers of time are limited capacity and bottlenecks. Answer: False The drivers of time are uncertainty and limited capacity (also known as bottleneck). 17. The average waiting time is the average amount of time an order will wait at the company's shipping office before it is sent to the customer. Answer: False The average waiting time is the average amount of time that an order will wait in line before it is set up and processed. 18. The objective of the theory of constraints is to increase throughput contribution while decreasing investments and operating costs. Answer: True 19. Throughput contribution is equal to revenues minus direct material and direct labor costs. Answer: False Throughput contribution is equal to revenues minus the direct materials cost of goods sold. 20. The cost of poor quality at a nonbottleneck operation is the cost of the materials wasted. Answer: True MULTIPLE CHOICE 21. Quality management provides an important competitive edge because it a. reduces costs. b. increases customer satisfaction. c. often results in substantial savings and higher revenues in the short run. d. does all of the above. Answer: d 22. Quality of design measures how closely the characteristics of products or services match the needs and wants of customers. Conformance quality a. measures the same things. b. is the performance of a product or service according to design and product specifications. c. is making the product according to design, engineering, and manufacturing specifications. d. focuses on fitness of uses from a customer perspective. Answer: b 23. Which of the following fail to satisfy conformance quality? a. Machines that fail to meet the needs of customers b. Machines that break down c. Depositing a customer's check into the correct account d. All of the above fail to satisfy conformance quality. Answer: b 24. Costs incurred in precluding the production of products that do not conform to specifications are a. prevention costs. b. appraisal costs. c. internal failure costs. d. external failure costs. Answer: a 25. Costs incurred in detecting which of the individual units of products do not conform to specifications are a. prevention costs. b. appraisal costs. c. internal failure costs. d. external failure costs. Answer: b 26. Costs incurred by a nonconforming product detected before it is shipped to customers are a. prevention costs. b. appraisal costs. c. internal failure costs. d. external failure. Answer: c 27. Preventive equipment maintenance is an example of a. prevention costs. b. appraisal costs. c. internal failure costs. d. external failure costs. Answer: a 28. Spoilage is an example of a. prevention costs. b. appraisal costs. c. internal failure costs. d. external failure costs. Answer: c 29. Liability claims is an example of a. prevention costs. b. appraisal costs. c. internal failure costs. d. external failure costs. Answer: d 30. Mount Vernon Furniture manufactures expensive tables. Its varnishing department is fully automated and requires substantial inspection to keep the machines operating properly. An improperly varnished table is very expensive to correct. Inspection hours for the 10,000 tables varnished in September totaled 2,500 hours by 16 employees. Eight quarts of varnish were used, on average, for each table. The standard amount of varnish per table is nine quarts. The cost of inspection for September was equal to the budgeted amount of $76,000. The $76,000 represents a. an activity cost pool. b. a possible cost allocation base. c. an internal failure cost. d. a work-in-process control. Answer: a 31. Mount Vernon Furniture manufactures expensive tables. Its varnishing department is fully automated and requires substantial inspection to keep the machines operating properly. An improperly varnished table is very expensive to correct. Inspection hours for the 10,000 tables varnished in September totaled 2,500 hours by 16 employees. Eight quarts of varnish were used, on average, for each table. The standard amount of paint per table is ten quarts. The cost of inspection for September was equal to the budgeted amount of $76,000. What is the inspection cost per unit? a. $30.40 b. $7.60 c. $3,800 d. $4,000 Answer: b Rate per unit = $76,000/10,000 units = $7.60 per unit 32. Cost of quality reports usually do not consider a. external failure costs. b. opportunity costs. c. internal failure costs. d. appraisal costs. Answer: b 33. Examples of opportunity costs include a. lost sales. b. forgone contribution margin. c. lower production. d. all of the above. Answer: d 34. A graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time is a a. control chart. b. Pareto diagram. c. cause-and-effect diagram. d. fishbone diagrams. Answer: a 35. Statistical quality control includes a control chart that a. graphs a series of random events of a process. b. plots each observation relative to specified ranges that represent the expected distribution. c. plots control observations over various periods of time. d. plots only those observations outside specified limits. Answer: b 36. When using a control chart, a manager does not investigate the activity when a. all observations are outside the preset range. b. some observations are outside the preset range. c. all observations are within the range of preset standard deviations. d. almost all observations are within the range of two standard deviations. Answer: c 37. A tool which indicates how frequently each type of defect occurs is a a. control chart. b. Pareto diagram. c. cause-and-effect diagram. d. fishbone diagrams. Answer: b 38. A tool which identifies potential causes of failures or defects is a. a control chart. b. a Pareto diagram. c. a cause-and-effect diagram. d. none of the above. Answer: c THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 39 THROUGH 41. Metropolitan Manufacturing expects to spend $400,000 in 20x4 in appraisal costs if it does not change its incoming materials inspection method. If it decides to implement a new receiving method, it will save $40,000 in fixed appraisal costs and variable costs of $0.40 per unit of finished product. The new method involves $60,000 in training costs and an additional $160,000 in annual equipment rental. It takes two units of material for each finished product. Internal failure costs average $80 per failed unit of finished goods. During 20x3, 5% of all completed items had to be reworked. External failure costs average $200 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories, because all jobs are on a per order basis and a just-in-time inventory ordering method is used. 39. What is the net effect on appraisal costs for 20x4, assuming the new receiving method is implemented and that 800,000 material units are received? a. $20,000 increase b. $20,000 decrease c. $200,000 decrease d. $220,000 increase Answer: a Current costs $400,000 Savings: Fixed $ 40,000 Variable 160,000 ($200,000) New method: Training cost $ 60,000 Equipment cost 160,000 220,000 20,000 New costs of method 420,000 Net change - Increase $ 20,000 40. How much will internal failure costs change, assuming 800,000 units of materials are received and that the new receiving method reduces the amount of unacceptable product units in the manufacturing process by 10%? a. $ 20,000 increase b. $ 25,000 decrease c. $80,000 decrease d. $160,000 decrease Answer: c Internal failure costs [(800,000/4) x 0.05 x $80] $800,000 10% reduction from new method x 0.10 Savings $ 80,000 41. How much will external failure costs change assuming 800,000 units of materials are received and that product failures with customers are cut in half with the new receiving method? a. $10,000 increase b. $200,000 decrease c. $320,000 decrease d. $400,000 decrease Answer: b External failure ((800,000/4) x 1% x $200) $400,000 Failure reduction of 50% x 0.50 Savings $200,000 THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 42 THROUGH 46. Regal Products has a budget of $900,000 in 20x3 for prevention costs. If it decides to automate a portion of its prevention activities, it will save $60,000 in variable costs. The new method will require $18,000 in training costs and $120,000 in annual equipment costs. Management is willing to adjust the budget for an amount up to the cost of the new equipment. The budgeted production level is 150,000 units. Appraisal costs for the year are budgeted at $600,000. The new prevention procedures will save appraisal costs of $30,000. Internal failure costs average $15 per failed unit of finished goods. The internal failure rate is expected to be 3% of all completed items. The proposed changes will cut the internal failure rate by one-third. Internal failure units are destroyed. External failure costs average $54 per failed unit. The company's average external failures average 3% of units sold. The new proposal will reduce this rate by 50%. Assume all units produced are sold and there are no ending inventories. 42. What is the net change in the budget of prevention costs if the procedures are automated in 20x4? Will management agree with the changes? a. $60,000 decrease, yes b. $78,000 increase, yes c. $60,000 increase, no d. $138,000 increase, no Answer: b New costs: Training $ 18,000 New equipment 120,000 $138,000 Savings 60,000 Net increase in budget $ 78,000 43. How much will appraisal costs change assuming the new prevention methods reduce material failures by 40% in the appraisal phase? a. $240,000 decrease b. $60,000 increase c. $30,000 decrease d. $12,000 decrease Answer: c The new prevention procedures will save appraisal costs of $30,000. 44. How much will internal failure costs change if the internal product failures are reduced by 50% with the new procedures? a. $33,750 decrease b. $67,500 decrease c. $500,000 decrease d. $750,000 decrease Answer: a Internal failure rate (150,000 x 0.03) 4,500 Cost per unit x $15 Total $67,500 Savings rate x 0.50 Savings $33,750 45. How much does external failure costs change if all changes are as anticipated with the new prevention procedures? Assume all units produced are sold and there are no ending inventories. a. $121,500 decrease b. $121,500 increase c. $243,000 decrease d. None of the above Answer: a External failure costs (150,000 x 0.03 x $54) $243,000 Savings rate x 0.50 Savings $121,500 46. Management has offered to allow the prevention changes if all changes take place as anticipated and the amounts netted are less than the cost of the equipment. What is the net impact of all the changes created by the preventive changes? a. $78,000 b. $(33,750) c. $(93,570) d. $(119,070) Answer: c Prevention changes, net $ 78,000 Appraisal changes, net (30,000) Internal failure changes, net (22,500) External failure changes, net (119,070) Net of all changes $ (93,570) 47. An important difference between financial measures of quality and nonfinancial measures of quality is a. financial measures of quality tend to be useful indicators of future long-term performance, while nonfinancial measures have more of a short-term focus. b. nonfinancial measures of quality tend to be useful indicators of future long-term performance, while financial measures of quality have more of a short-term focus c. nonfinancial measures are generally too subjective to have any long-term value. d. there is no substantive difference between the financial and nonfinancial measures of quality. Answer: b 48. Examples of nonfinancial measures of quality include a. percentage of defective units shipped to customers as a percentage of total units shipped. b. the number of customer complaints. c. percent of products that experience early or excessive failure. d. all of the above are nonfinancial measures of quality. Answer: d 49. The ratio of good output to total output is referred to as a. cause and effect. b. process yield. c. conformance quality. d. quality of design. Answer: b 50. The ratio of the number of processes where employees have rights to make decisions without consulting supervisors to the total number of processes is a. employee satisfaction. b. employee empowerment. c. employee turnover. d. process yield. Answer: b 51. Nonfinancial measures of quality are of limited use by themselves. They are more informative when a. combined with trend analysis. b. used with the half-life depreciation method. c. used with nonroutine financial data. d. used alone. Answer: a 52. The cost of quality measure has all of the following advantages EXCEPT a. being a useful measure of comparing different quality improvement projects. b. serving as a common denominator for evaluating trade-offs among prevention and failure costs. c. focusing on how costly poor quality can be. d. being in existence in almost every production circumstance. Answer: d 53. A disadvantage of nonfinancial measures of quality include a. often difficult to quantify. b. often difficult to understand. c. they are not useful indicators of future long-run performance. d. none of the above are disadvantages of nonfinancial measures of quality. Answer: d 54. The amount of time from when a customer places an order for a product or requests a service to when the product or service is delivered to the customer is referred to as a. manufacturing lead time. b. bottleneck. c. customer-response time. d. time driver. Answer: c 55. The amount of time from when an order is ready to start on the production line to when it becomes a finished good is referred to as a. manufacturing lead time. b. bottleneck. c. customer-response time. d. time driver. Answer: a 56. Companies that use manufacturing lead time as the base for allocating manufacturing costs to products consider that it has the following benefit(s): a. Managers are motivated to reduce the time taken to manufacture products. b. Total overhead costs decrease. c. Operating income rises. d. All of the above are benefits. Answer: d 57. Any factor where change in the factor causes a change in the speed with which an activity is undertaken is referred to as a. time driver. b. bottleneck. c. manufacturing lead time. d. customer-response time. Answer: a 58. _______________ is an operation where the work to be performed approaches or exceeds the available capacity. a. A bottleneck b. A time driver c. Customer-response time d. Manufacturing lead time Answer: a 59. In the formula to calculate the average waiting time, the manufacturing time is squared. The reason is a. the shorter the manufacturing time, the less the chance that the machine will be in use when an order arrives. b. the shorter the manufacturing time, the greater the chance that the machine will be in use when an order arrives. c. the longer the manufacturing time, the greater the chance that the machine will be in use when an order arrives. d. the longer the manufacturing time, the less the chance the machine will be in use when an order arrives. Answer: c 60. For a fast-food restaurant, the average waiting time might be formulated as a. [(average number of customers) x (average serving time)2] 2 x [serving capacity - (avg. # of customers x avg. serving time)] b. [(average number of customers) x (average serving time)2] / capacity c. [(average customers per hour) x (average serving time)2] 60 minutes d. [(average customers per hour) x (average serving time)2] (60 minutes) x (number of workers) Answer: a THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 61 THROUGH 63. Ballard's Glass Company has a variable demand. Historically, its demand has ranged from 10 to 20 windows per day with an average of 15. John Ballard works eight hours a day, five days a week. Each order is one window and each window takes 26 minutes. 61. What is the average waiting time, in minutes? a. 1.6 b. 4.4 c. 28.2 d. 56.3 Answer: d Waiting minutes = [15 x (26 squared)] / {[2 x [480 minutes per day- (15 x 26)]} =56.33 minutes 62. What is the cycle time for an order? a. 26 minutes per window b. 56.4 minutes per window c. 82.3 minutes per window d. 520 minutes per day Answer: c Cycle time = waiting time + manufacturing time = 56.33 + 26 = 82.33 63. Ballard plans to add doors to its product line and anticipates that they will average 5 doors per day. Each door takes 12 minutes to install. What is the average waiting time, in minutes, if Ballard continues to be the only worker? a. 38.0 minutes b. 112.4 minutes c. 181.0 minutes d. 410.0 minutes Answer: c WT = (15 x (26) 2) + (5 x (12) 2) = 10,860/60 = 181 minutes {2 x [480 - (15 x 26) - (5 x 12)]} 64. The theory of constraints is used for cost analysis when a. a manufacturing company produces multiple products and uses multiple manufacturing facilities and /or machines. b. using a long-term time horizon. c. operating costs are assumed fixed. d. all of the above are correct. Answer: a 65. Throughput contribution equals a. revenues minus direct material and direct labor costs. b. revenues minus direct material costs and minus operating costs. c. revenues minus direct material costs of goods sold. d. revenues minus operating costs. Answer: c 66. Keeping the bottleneck operation busy and subordinating all nonbottleneck operations to the bottleneck operation involves a. maximizing the contribution margin of the nonbottleneck operation. b. keeping the bottleneck resource busy at least 90% of the time. c. having the workers at the nonbottleneck operation or machine improving their productivity. d. none of the above. Answer: d 67. Producing more nonbottleneck output a. creates more inventory, but does not increase throughput contribution. b. creates more inventory and increases throughput contribution. c. creates less pressure for the bottleneck workstations. d. allows for the maximization of overall contribution. Answer: a THE FOLLOWING INFORMATION APPLIES TO QUESTIONS 68 AND 69. Speedy Dress Manufacturing has two workstations, cutting and finishing. The cutting station is limited by the speed of operating the cutting machine. Finishing is limited by the speed of the workers. Finishing normally waits for work from cutting. Each department works an eight-hour day. If cutting begins work two hours earlier than finishing each day, the two departments generally finish their work at about the same time. Not only does this eliminate the bottleneck, but also it increases finished units produced each day by 160 units. All units produced can be sold even though the change increases inventory stock by 20% from 400 units. The cost of operating the cutting department two more hours each day is $1,600. The contribution margin of the finished products is $6 each. Inventory carrying costs are $0.40 per unit per day. 68. What is the total production per day if the change is made? a. 6400 units b. 800 units c. 880 units d. 1600 units Answer: b Units per hour = 160/2 = 80 units per day = 80 x 10 = 800 units 69. What is the change in the daily contribution margin if the change is made? a. $(608) b. $(634) c. $(672) d. $800 Answer: c Total contribution margin (160 x $6) $ 960 Carrying cost (32) Increased costs (1,600) Net change in contribution margin $ (672) 70. The Glass Shop, a manufacturer of large windows, is experiencing a bottleneck in its plant. Setup time at one of its workstations has been identified as the culprit. A manager has proposed a plan to reduce setup time at a cost of $72,000. The change will result in 8,000 additional windows. The selling price per window is $18, direct labor costs are $3 per window, and the cost of direct materials is $5 per window. Assume all units produced can be sold. The change will result in an increase in the throughput contribution of a. $104,000. b. $80,000. c. $32,000. d. $8,000. Answer: a 8,000 x (18-5) = $104,000 EXERCISES AND PROBLEMS 71. Write a paragraph outlining how a manufacturer of personal computers such as Dell Computer can benefit from the introduction of a quality improvement program. Answer: (Answers may vary) A quality improvement program for Dell would result in substantial savings in operating costs and higher revenues. Operating costs would be reduced since fewer funds would be spent checking output and correcting defective products. Higher revenues would result since existing customers would likely increase their orders and the higher quality output would attract additional customers. In addition, a number of competitors will likely be implementing quality programs. Dell must meet the competition. 72. The two basic aspects of quality are quality of design and conformance quality. Define and give an example of each. Answer: Quality of design measures how closely the characteristics of products or services meet the needs and wants of customers. For example, customers of photocopying machines want copiers that combine copying, faxing, scanning, and electronic printing. If the photocopy machines fail to meet these customer needs, sales will fall. Conformance quality refers to the performance of a product or service according to design and product specifications. For example, if a photocopy machine constantly has paper jams or breaks down, it fails to satisfy conformance quality. 73. The Door Company manufactures doors. Classify each of the following quality costs as prevention costs, appraisal costs, internal failure costs, or external failure costs. a. Retesting of reworked products b. Downtime due to quality problems c. Analysis of the cause of defects in production d. Depreciation of test equipment e. Warranty repairs f. Lost sales arising from a reputation for poor quality g. Quality circles h. Rework direct manufacturing labor and overhead i. Net cost of spoilage j. Technical support provided to suppliers k. Audits of the effectiveness of the quality system l. Plant utilities in the inspection area m. Reentering of data because of keypunch errors _______________ Prevention costs _______________ Appraisal costs _______________ Internal failure costs _______________ External failure costs Answer: g, j____________ Prevention costs d, l, k__________ Appraisal costs a, b, c, h, i, m____ Internal failure costs e, f, m__________ External failure costs 74. Dawn and Kim just bought a bed and breakfast inn at a very attractive price. The business had been doing poorly. Before they reopened the inn for business, they attended a seminar on operating a high quality business. Now that they are ready to open the inn, they need some advice on quality costs and management. Required: Identify four categories of quality costs. In addition, identify three items that would be classified in each of the categories. Answer: (Answers will vary) Prevention: Hiring employees with good references Training of owners and employees Good security Good reservation system Purchasing quality furniture Appraisal: Verifying accuracy of reservation and registration procedures Inspecting rooms, facilities, building and grounds regularly Observing activities of employees Testing furniture and fixtures Taste testing food Internal failure: Recleaning rooms and facilities Restocking rooms with linens, glasses, etc. Out of stock supplies Reinspection Failure to bill on a timely basis External failure: Responding to complaints about rooms and food Responding to complaints about reservations Emergency cleaning of rooms when not ready on time Customer refunds because of unsatisfactory conditions Opportunity cost of lost revenue resulting from unhappy customers 75. Discuss the methods used to identify quality problems. Answer: 1. A control chart is a graph of a series of successive observations of a particular step, procedure, or operation taken at regular intervals of time. 2. A Pareto diagram indicates how frequently each type of failure (defect) occurs. 3. A cause-and-effect diagram helps to identify potential causes of failures or defects. 76. A corporation can measure its quality performance by utilizing financial or nonfinancial measures of quality. Discuss the merits of each method and whether the use of one precludes the use of the other. Answer: Financial measures of quality are quantifiable. The business can calculate the costs of setting up quality control systems, the costs of noncompliance with quality in terms of the internal and external costs (rework, warranty costs etc.), and estimate the revenues lost as a result of quality problems. Nonfinancial measures of quality are useful indicators of future long-run performance. They are helpful in revealing future needs and preferences of customers and in indicating the specific areas that need improvement. The use of one does not preclude the use of the other. Financial measures tend to be short term in nature (what is happening now). Nonfinancial measures tend to be long term and are useful in terms of estimating trends. Financial performance measures are more readily available than nonfinancial measures, but are no more important to the overall goals of the organization. By considering nonfinancial measures, the organization can improve operational control. Superior financial performance usually follows from superior nonfinancial performance. 77. Design Products is committed to its quality program. It works with all areas of the company to establish sound quality programs within reasonable budget guidelines. For 20x3, it has budgeted $1,000,000 for prevention costs and $800,000 for appraisal costs. Internal failure has a budget of $100 per failed item, while external failure has a total budget of $600,000. Product Testing has proposed to management a change in the 20x3 budget for a new method of testing products. If management decides to implement the new method, $2 per unit of appraisal costs will be saved, up to a level of 200,000 tests. No additional savings are expected past the 200,000 level. The new method involves $110,000 in training costs and $60,000 in yearly testing supplies. Traditionally, 3% of all completed items have to be reworked. External failure costs average $120 per failed unit. The company's average external failures are 1% of units sold. The company carries no ending inventories. Required: a. What is the adjusted budget for appraisal costs, assuming the new method is implemented and 800,000 units are tested during the manufacturing process in 20x3? b. How much do internal failure costs change, assuming 600,000 units are tested under the new method and it reduces the amount of unacceptable units in the manufacturing process by 40%? c. What would be the change in the external failure budget, assuming external failures are reduced by 60% and the same facts as in part (b)? Answer: a. Current Budget $ 800,000 Additions: Training $110,000 Additions: Supplies 60,000 170,000 Savings: 200,000 x $2 (400,000) Adjusted budget $ 570,000 b. Current budget $100 x 0.03 x 600,000 = $1,800,000 Savings rate x 0.40 Net savings (reduction in internal failure costs) $ 720,000 c. Current budget $120 x 0.01 x 600,000 = $ 720,000 Savings rate x 0.60 Net savings (reduction in external failure budget) $ 432,000 78. Brown Laundry has a variable demand. The daily demand ranges from 100 to 140 customers a day with an average of 5 items. The average daily demand is 110 customers. The laundry operates 10 hours a day. Each order takes approximately 5 minutes. Required: a. What is the average customer waiting time, in minutes? b. What is the cycle time for an order? c. The manager has decided that the waiting time is too long and has increased the workday to 11 hours. What is the waiting time now? Will the customers be any happier? Answer: a. Waiting minutes = [110 x (5) 2]/{2 x [600 minutes per day - (110 x 5)]} = 27.5 minutes b. Cycle time = waiting time + processing time = 27.5 + 5 = 32.5 minutes c. Waiting minutes = [110 x (5) 2] / {2 x [660 minutes per day - (110 x 5)]} = 12.5 minutes The customers are probably not much happier unless they change the time when they stop by the laundry. If the customers now fill the 11-hour day, the new reduced waiting time will be a definite improvement. 79. Little Dog Unlimited makes small motorcycles. The monthly demand ranges from 80 to 100 motorcycles. The average demand is 92 motorcycles. The plant operates 300 hours a month. Each cycle takes approximately 1.5 hours. If the company adds a new line of scooters, initial demand will be 20 per month. Each scooter will take 1 hour to make. To offset approaching production capacity, expanding the assembly line is possible. This will decrease manufacturing time for all products by 20%. However, this will increase the costs of cycles from $400 to $500 and scooters from $200 to $240. The change will also cause increases in prices from $700 to $750 for cycles and from $450 to $500 for scooters. Required: a. What is the average waiting time for cycles if they are the only item manufactured? b. What are the average waiting times if both cycles and scooters are produced and the assembly line is not enlarged? c. What are the average waiting times if both cycles and scooters are produced and the assembly line is enlarged? 79. (continued) d. What is the expected monthly margin without scooters if the company sells all 92 cycles it manufactures? e. What are the expected monthly contribution margins if scooters are made with the current assembly line and with the new assembly line? Assume average sales and that sales equal production. f. What action do you recommend? Answer: a. Waiting time = [92 x (1.5)2] / {[2 x [300 hr. a month - (92 x 1.5)]} = 0.639 hours b. WT = 92 x (1.5)2 + (20 x 1) / {2 x [300 - (92 x 1.5) - (20 x 1)]} = 227/284 = 0.799 hours c. WT = 92 x (1.2)2 + (20 x (0.8)2) / {2 x [300 - (92 x 1.2) - (20 x 0.8)]} = 145.28/347.2 = 0.418 hours d. Expected monthly margin without scooters: Motorcycle sales (92 x $700) $64,400 Manufacturing costs (92 x $400) 36,800 Expected margin $27,600 e. Without changing assembly line: Motorcycle sales (92 x $700) $64,400 Scooter sales (20 x $450) 9,000 Total expected sales 73,400 Manufacturing costs: Motorcycles (92 x $400) $36,800 Scooters (20 x $200) 4,000 40,800 Expected margin $32,600 With new assembly line: Motorcycle sales (92 x $750) $69,000 Scooter sales (20 x $500) 10,000 Total expected sales 79,000 Manufacturing costs: Motorcycles (92 x $500) $46,000 Scooters (20 x $240) 4,800 50,800 Expected margin $28,200 f. Unless there are critical customer relation problems with a slower response time, the scooters should be added without changing the assembly line. The expected margin is $4,400 higher without the new assembly line. 80. Brix, Inc., prepares frozen food for fast-food restaurants. It has two workstations, cooking and assembly. The cooking station is limited by the cooking time of the food. Assembly is limited by the speed of the workers. Assembly normally waits on food from cooking. Because the demand has increased in recent months to 2,800 dozen units, management is considering adding another cooking station or else having the cooks start to work earlier. The monthly cost of operating the cooking station one more hour each day is $2,400. The cost of adding another cooking station would add an average of $10 per hour. The current operating hours total eight hours a day, 22 days a month. The contribution margin of the finished products is currently $8 per dozen. Inventory carrying costs average $2.00 per dozen per month. Either the extra hour or the new cooking station would increase production by 20 dozen a day, with a long-run increase of 80 dozen units in finished goods inventory to 280 dozen. Required: a. What is the total production per month if the change is made? b. What is the increase in the expected monthly product contribution for each of the possible changes? Assume long-run production equals sales. Answer: a. Total dozen per month = 2,800 + (22 x 20) = 3,240 b. Current product contribution margin (2,800 x $8) $22,400 Carrying costs (200 x $2) 400 Current net contribution $22,000 More hours: Expected product contribution margin (3,240 x $8) $25,920 Carrying costs (280 x $2) $ 560 Increased costs 2,400 2,960 Expected net product contribution $22,960 Increase = $22,960 - $22,000 = $ 960 New cooking station: Expected product contribution margin (3,240 x $8) $25,920 Carrying costs (280 x $2) $ 560 Increased costs ($10 x 22 x 8) 1,760 2,320 Expected net product contribution $23,600 Increase = $23,600 - $22,000 = $1,600 CRITICAL THINKING 81. Baby Care Products has just completed a very successful program of improving quality in its manufacturing operations. The next step is to improve the operations of its administrative functions, starting with the accounting information system. As the manager of the accounting operations, you are requested to begin a quality improvement program. Required: What are some possibilities of finding out about the current status of quality in the accounting system? Answer: The manager might begin by identifying "customer" needs. Then the manager might use one of the methods of identifying quality problems. Statistical quality control helps to distinguish between random variation and nonrandom variation. A control chart of observations usually accompanies this. Another method is the use of a Pareto diagram. This indicates how frequently each type of failure occurs. Also, cause-and-effect diagrams help to identify potential causes of failure. A fishbone diagram is often used here to identify multiple causes of failure. Quality of design could potentially be the biggest problem. 82. The Custom Shirt House is concerned about its declining sales, especially the reduction in the number of customers. For the last two years, its shirts have won industry awards for high quality and trend-setting styles. At the latest executive managers' meeting, everyone was blaming everyone else for the decline. After much discussion and the presenting of some fact-finding information, it was determined that sales relationships were the cause of most of the problems. Required: What may be some of the causes and how can the causes be detected if product quality is not an issue? Answer: The causes may be customer satisfaction with sales staff (poor sales skills), delivery problems (not on time), accounting problems (poor billing and collection procedures), or poor returns and allowance policies. The causes may be detected by comparing nonfinancial measures of the company with those found in the industry. These might include measures of: number of shipments incorrect or not on time, number of customer complaints about certain areas (billing, shipping, etc.), response time to customer complaints, or a questionnaire about why former customers quit buying from the company. 83. Acme Janitor Service has always taken pride in the fact that it had one of the highest customer response times in the home cleaning service industry. However, as the products manufactured for this industry have become more complex, the company's customer response time has declined. Required: Why do you think that response time declined if all other quality factors have remained the same? Answer: If quality production was one of the other control factors, and the products became more complex, it probably takes more time to inspect and verify the quality of the finished products. Therefore, to maintain the same level of quality, additional time had to be put into the product cycle. Apparently this was not allowed for in the setting of the production times of the newer, more complex products. 84. The Alpha Beta Corporation experiences numerous instances of constraints hindering the effective operation of their manufacturing process. Identify the methods that might be utilized to maximize operating income, and minimize the effect of the constraints. Answer: A manager's objective should be to increase throughput contribution (revenues minus direct material costs) while decreasing investments and operating costs. The manager should consider adjusting the product mix to maximize the total contribution margin. Another possibility is subcontracting out part of the production process. Quality considerations should be paramount, since a defective unit, or one that has to be reworked, is in effect replacing a unit that could be sold. 85. A machine has been identified as a bottleneck and the source of the constraint for a manufacturing company that has multiple products and multiple machines. Discuss ways the company can overcome the bottleneck. Answer: The ways include: a. Eliminating idle time at the bottleneck operation. Extra staffing at the bottleneck would be a possibility, particularly if numerous manual type tasks were involved. b. Concentrate on processing those parts or products that increase throughput contribution, not parts or products that remain in finished goods or spare parts inventories. c. Shift a part of the products produced at the bottleneck machine to other machines or outsource part of the production. d. Solicit the opinions of the factory workers for ideas as to how the design of the manufacturing process can be simplified. e. Improve the quality of the production process. Poor quality is especially costly at a bottleneck operation.