You are the operations manager for a small kayak and canoc manufacturer (Valley Kayaks) locate on the Pacific Northwest (Oregon) Lately your company has experience product quality problems. Simply put, the kayaks that you produce occasionally have defects and require rework. Consequently, you have decided to assess the impact of introducing a quality management (TQM) program. After discussing the potential effects with representatives from marketing, finance, accounting, and quality, you arrive at a set of estimates (contained in the following table). Top management has told you that it will accept any proposal that you come up with, provided that it improves the return on assets measure by at least 30%. Show your calculations and then determine if you would go forward with this proposal? Category Current Values Estimated Impact of TOM
Sales $2,000,000 5% + (improvement)
Cost of goods sold $1,500,000 0%
Variable expenses $300,000 8.25%-(reduction)
Fixed expenses $100,000 0%
Inventory $30,000 25%
Accounts receivable $100,000 10%
Other current assets $500,000 0%
Fixed assets $400,000 0%

I would go forward with the proposal as it improves the return on assets by more than 125%

Explanation:

a) Data:

1. Category               Current Values     Estimated Impact of TOM

Sales                          $2,000,000          5% + (improvement)

Cost of goods sold    $1,500,000          0%

Variable expenses       $300,000           8.25%-(reduction)

Fixed expenses            $100,000            0%

Inventory                        $30,000            25%

Accounts receivable    $100,000            10%

Other current assets  $500,000            0%

Fixed assets                $400,000            0%

b) Calculations:

1. Category               Current Values     Estimated Impact of TQM

Sales                          $2,000,000          $2,100,000

Cost of goods sold    $1,500,000          $1,500,000

Variable expenses       $300,000            $275,250

Fixed expenses            $100,000             $100,000

Returns                         $100,000             $224,750

Current Assets:

Inventory                        $30,000               $37,500

Accounts receivable    $100,000              $110,000

Other current assets  $500,000            $500,000

Fixed assets                $400,000            $400,000

Total assets              $1,030,000           $1,047,500

Return on assets = Returns/Total Assets * 100    

                            =      9.71%                     21.46%

Improvement = Return on assets with TQM minus Current Return on assets divided by Current Return

= ($224,750 - $100,000) / $100,000 * 100

= 1.25 or 125%

Improvement > 30% from 9.71 to 21.46%, which is more than 100% increase.

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