Question:
At the beginning of the year, Asquith Company Ltd 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, Asquith's managers collected the following data for the current and preceding year:
|
Preceding year
|
Current year
|
|
Sales
|
$10,000,000
|
$10,000,000
|
|
Quality training
|
45,000
|
50,000
|
|
Materials inspection
|
100,000
|
140,000
|
|
Scrap
|
500,000
|
450,000
|
|
Product warranty
|
900,000
|
800,000
|
|
Rework
|
750,000
|
600,000
|
|
Product inspection
|
200,000
|
220,000
|
|
|
|
|
(A) Compute prevention costs, appraisal costs, internal failure costs and external failure costs as a percentage of sales in separate tables for the preceding year and the current year.
(B) How much has profit increased as a result of quality improvements?
(C) If quality costs can be reduced even further to 2.5% of sales, how much additional profit would result? Is there any evidence to suggest this reduction in quality costs may be feasible? Explain.