Ace Company’s 2011 Costs of Quality (COQ) results are given as follows:
Expense Item 2011 COQ
Raw Materials Inspection $ 15,000
EPA Fine 200,000
Design Engineering 15,000
Product Testing 25,000
Rework Costs 50,000
Preventive Maintenance 10,000
Customer Returns 125,000
For 2011, Ace produced and sold = 125,000 units at a sales price per unit of $50.00.
Customer surveys conducted late in 2011 indicate poor customer satisfaction ratings because of poor
product quality for Ace’s products. Ace's management team is considering a Quality Initiative Program
to improve product quality and customer satisfaction. The Quality Initiative would include the following
? Product design changes that provide better product functionality $ 65,000
? Preventive equipment maintenance 20,000
? Increase inspection of direct materials from suppliers 20,000
? Increase product testing 30,000
Expected benefits from the Quality Initiative Program are as follows:
? Reduce the EPA fine by $150,000
? Reduce Customer Returns by 38.20%
? Reduce Scrap Costs by 65%
? Reduce Rework by 50%
Based on the information above provide answers to questions 1. through 5. on the following pages.
Show calculations to support/validate your answers and clearly show your answer to each of the
1. For the 2011 COQ results, sort the COQ Expense Items by COQ by category. Provide total COQ by
COQ category and calculate the percentage of each COQ category to Total Quality Costs.
2. What is the 2011 Total COQ as a percentage of Total Revenue?
3. Assume Ace Co. implements the Quality Initiative Program. Calculate the revised COQ amounts for
each expense item by COQ category after accounting for the costs and benefits of the Quality
Initiative Program. Calculate the revised COQ by COQ category, and as a percentage of Total Quality
4. What is the Total COQ AFTER the Quality initiative Program as a percentage of Revenue (assume no
changes to units produced or sold and no changes to the sales price)?
5. Discuss the expected results of the Quality Initiative Program for each COQ category and Ace Co. in
Internal Failure -
External Failure –
Ace Co. -