Reference no: EM132633760

PAKEL Tool Company is located in one of the Multi-Facility Economic Zone (MFEZ) in Zambia. The Company has been in existence for over five years and has a policy of building an excellent reputation for service and quality. Consequently, the Company requires all new employees to take its three-hour quality training program. The estimated annual cost of this program is $30,000. To ensure that only conforming products are shipped to customers, four inspectors are involved with final inspection (product acceptance), each earning a monthly salary of $5,000. Additionally, to ensure that it attends to its customers after sales, the Company employs three full-time employees in its complaints department, each earning $40,500 a year, and allows for after sales visits, with sales allowances totalling $45,000.

• The annual turnover of PAKEL Tool Company was slightly more than $15,000,000 in 2019. This was more or less the same as the turnover in the previous two years. However, the net income has been around $1,500,000. The General Manager of PAKEL Tool Company is convinced that the Company's profitability can increase significantly by improving quality - provided the potential for improvement exists. The General Manager has therefore tasked you, the Quality Manager, to provide details of the quality costs currently being incurred, and advise on whether the Company should invest in a quality improvement program. To enable you, the Quality Manager, perform a comprehensive analysis, you have collected relevant quality data for 2019 from the production personnel, inspectors and complaints department. A review of this data shows that customers returned 90,000 units needing repair that cost an average of $1 per unit. A total of 150,000 units were scrapped, of which 60% is quality related. The cost of scrap is about $5 per unit. The inspectors rejected 450,000 units during product acceptance tests. Fortunately, 80% of these were recovered through rework at a cost of $0.75 per unit. There was also an order cancellation that would have increased profits by $150,000. The customer's reason for cancellation was poor product performance.

Question 1: Give a self-explanatory report to the General Manager as per the request made. Clearly indicate any assumptions you make.