At the beginning of the year, Donjuan Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:
|
Preceding Year-
|
Current Year
|
|
Sales
|
$4,000,000
|
$4,000,000
|
|
Quality training
|
10,000
|
15,000
|
|
Materials inspection
|
25,000
|
35,000
|
|
Scrap
|
200,000
|
180,000
|
|
Rework
|
250,000
|
200,000
|
|
Product inspection
|
40,000
|
60,000
|
|
Product warranty
|
40,000
|
60,000
|
|
Product warranty
|
300,000
|
250,000
|
1. Classify each of the costs as prevention costs, appraisal costs, internal failure costs, or external failure costs: (a)quality training; (b)materials inspection; (c)scrap; (d)rework; (e) product inspection; (f) product warranty.
2. Compute each category of quality costs as a percentage of sales:
|
Preceding Year
|
Current Year
|
|
Prevention costs
Appraisal costs
Internal failure costs
External failure costs
|
|
|
3. (a) How much has profit increased as a result of quality improvement?
(b) If quality costs can be reduced to 2.5 percent of sales, how much additional profit will result?