# Quality versus costs

### Quality versus costs Chapter 4

28. Quality versus costs. Assume Clearly Canadian has discovered a problem involving the  mix of flavor to their seltzer water that costs the company \$3,000 in waste and & \$ 2500 in lost business per period. There are two alternative solutions. The first is to lease a new mix regulator at a cost of \$4,000 per period. The new regulator would save Clearly Canadian \$2,000 in waste and \$2,000 in lost business each period. The second alternative is to hire an additional employee to manually monitor the existing regulator at a cost of \$2,500 per period.

This would save Clearly Canadian \$1,500 in waste and \$800 in lost business per period.

Which alternative should Clearly Canadian choose?

29

Quality versus costs. Susan Scott has discovered a problem involving the mix of lye to the dry concrete mix that costs the company \$20,000 in waste and \$14,000 in lost business per period. There are two alternative solutions. The first is to lease a new mix regulator at a cost of \$14,000 per period. The new regulator would save Susan \$14,000 in waste and \$8,000 in lost business. The second alternative is to hire an additional employee to manually monitor the existing regulator at a cost of \$12,000 per period. This would save Susan \$10,000 in waste and \$8,000 in lost business per period.

Which alternative should Susan choose?

38 Eastsound operates daily round-trip flights between two cities using a fleet of three planes: the Viper, the Tiger, and the Eagle. The budgeted quantity of fuel for each round trip is the average fuel usage, which over the past 12 months has been 150 gallons. Eastsound has set the upper control limit at 180 gallons. The operations manager received the following report for round-trip fuel usage for the period by the three planes.

a. Create quality control charts for round-trip fuel usage for each of the three planes for the period. What inferences can you draw from them?

b. Some managers propose that Eastsound present its quality control charts in monetary terms rather than in physical quantities (gallons). What are the advantages and disadvantages of using monetary fuel costs rather than gallons in the quality control charts?

Chapter 5

21 Cost Behavior when costs are semi variable: Data from the payroll department of Dominguez Company for the past two months follow:

November………..# of employees paid 6,000…….Payroll department costs \$12,000

December………..# of employees paid 9,000…….Payroll department costs \$15,000

a. Sketch a line describing these costs as a function of the number of employees paid.
b. What is the apparent variable cost per employee paid?
c. The line should indicate that these costs are semi variable. What is the apparent fixed cost per month of running the payroll department during November and December?

27. Interpreting regression results. The output of a regression of overhead costs on direct labor costs per month follows;

Regression Result

Equation:

Intercept………………………………………………………………………………………………… \$38,000

Slope……………………………………………………………………………………………………… 2.20

Statistical Data:

…….R2…………………………………………………………………………………………………… 0.85

Smalltime Consulting Services plans to operate at a level that would call for direct labor
costs of \$20000 per month for the coming year.

a. Use the regression output to write the overhead cost equation.

b. Based on the cost equation, compute the estimated overhead cost per month for the coming year.

c. (See Appendix 5.2.) How well does this regression explain the relation between direct labor and overhead?

29 Cost estimation using regression analysis. Milky Chocolates has observed the following overhead costs for the past 12 months:

Month                                            Overhead Costs/                 Boxes of Output

January……………………………………….. \$11,400                 4,500
February…………………………………….. 15,600                     11,000
March…………………………………………. 16,800                   12,000
April……………………………………………. 12,000                   5,500
May……………………………………………… 14,100                 9,000
June……………………………………………… 15,600             10,500
July………………………………………………. 13,200              7,500
August………………………………………….. 12,300               5,000
September……………………………………. 15,600                 11,500
October………………………………………… 12,900               6,000
November…………………………………….. 14,400                 8,500
December…………………………………….. 15,000                 10,000

a. Plot the data and the regression line (like Problem 5.4 for Self-Study).
b. Estimate total monthly costs for a month when 10,200 boxes of chocolate are produced.

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