You are the operations manager for a small kayak and canoe m

You are the operations manager for a small kayak and canoe manufacturer (Valley Kayaks) located on the Pacific Northwest (Oregon). Lately your company has experienced 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 total 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 they will accept any proposal that you come up with PROVIDED that it improves the return on assets measure by at least 15 percent Use Figure 2.3. Category Sales Cost of goods sold Variable expenses Fixed expenses Current Values $ 4,524,000 $ 3,480,000 $580,000 $226,200 $312,000 $327,000 $582,000 $534,000 Estimated Impact of TQM 7% 0% 8.00% 0% 25% 0% 0% 0% + (improvement) -(reduction) - Accounts receivable Other current assets Fixed assets a.Calculate ROA with changes and without changes? (Round your answers to 2 decimal places.) ROA With changes Without changes b. Would you go forward with this proposal to improve quality? Yes No

Solution

Net profit or net income = Sales - Cost of goods sold - Variable expenses - Fixed expenses = 4524000-3480000-580000-226200 = 237800

Total Assets = Fixed Assets +Current Assets +Inventory + Account recievables = 534000+582000+312000+327000 =1755000

Return on assets before change= Net income/ Total Assets = (237800/1755000)*100 =13.55%

New Sales = 4524000*1.07= 4840680

new variable expense = 580000*0.92 = 533600

Net profit or net income = Sales - Cost of goods sold - Variable expenses - Fixed expenses = 4840680-3480000-533600-226200 = 600880

New inventory = 312000*0.75 = 234000

Total Assets = Fixed Assets +Current Assets +Inventory + Account recievables = 534000+582000+234000+327000 =1677000

Return on assets after change= Net income/ Total Assets = ( 600880/1677000)*100 =35.83%

ROA before*1.15 = 13.65*1.15=15.69%

New ROA is 35.83% way above than what managemnt wanted after change hence the change must be implemented

Hence Answer - (b) Yes