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Cost of goods sold6,500,000Required:Calculate by how much profits would increase if quality costs were reduced to 2.0 percent of sales.ANSWER: ($400,000 + $300,000 + $225,000 + $150,000) - ($12,000,000 × 2.0%) = $835,000192. In 2016, Exceptional Foods instituted a quality improvement program. At the end of 2017, the management of the corporation requested a report to show the amount saved by the measures taken during the year. The actual sales and actual quality costs for 2016 and 2017 are as follows:20162017Sales$1,000,000$1,500,000Scrap30,00037,500Rework40,00025,000Training program10,00012,000Consumer complaints20,00012,500Lost sales, incorrect labeling16,000--Test labor24,00020,000Inspection labor50,00060,000Supplier evaluation30,00026,000Exceptional's management believes that quality costs can be reduced to 2.5 percent of sales within the next five years. At the end of Year 2017, Exceptional's sales are projected to have grown to $1,500,000. The relative distribution of quality costs at the end of Year 2017 is as follows:Scrap15%Training20%Supplier evaluation25%Test labor25%Inspection15%Total quality costs100%Required:a.Prepare a long-range performance report that compares the quality costs incurred at the end of 2017 with the quality-cost structure expected at the end of 2020.b.Are the targeted costs in Year 2017 all value-added costs?c.What would be the increase in profits in 2017 if the 2.5 percent performance standard is met in that year?
Chapter 14: Quality and Environmental Cost ManagementANSWER: a.Long-Range Performance ReportExceptional FoodsFor the Year Ended December 31, 2015Actual Costs*Long-Range2017Target Costs**VariancePrevention costs:Training program$ 12,000$ 7,500$ 4,500 USupplier evaluation26,0009,37516,625UTotal prevention$ 38,000$16,875$ 21,125 UAppraisal costs:Test labor$ 20,000$ 9,375$ 10,625 UInspection labor60,0005,62554,375UTotal appraisal$ 80,000$15,000$ 65,000 UInternal failure costs:Scrap$ 37,500$ 5,625$ 31,875 URework25,000-0-25,000UTotal internal failure$ 62,500$ 5,625$ 56,875 UExternal failure costs:Consumer complaints$ 12,500$ -0-$ 12,500 ULost sales, labeling-0--0--0-Total external failure$ 12,500$-0-$ 12,500UTotal quality costs$193,000$37,500$155,500UPercent of Actual Sales12.9%2.5%10.4% *Based on sales of $1,500,000.** for year 2017b.Prevention and some appraisal costs can be interpreted as value-added costs. All failure costs are non-value-added. Thus, the distribution of costs for year 2017 are not all value-added.c.There would be a $155,500 increase in profits in 2017 if total quality costs are 2.5 percent of sales and the targeted distribution is achieved.
Chapter 14: Quality and Environmental Cost Management193. In 2016, Creative Design, Inc., instituted a quality improvement program. At the end of 2017, the management of the corporation requested a report to show the amount saved by the measures taken during the year. The actual sales and actual quality costs for 2016 and 2017 are as follows:20162017Sales$125,000$150,000Scrap3,7503,750Rework5,0002,500Training program1,2501,500Consumer complaints2,5001,250Lost sales, incorrect labeling2,000--Test labor3,0002,000Inspection labor6,2506,000Supplier evaluation3,7503,250Required:a.Classify each cost as variable or fixed with respect to sales and compute the variable cost ratio for 2016. Be careful—costs may change because of quality improvement, not cost behavior.b.How much did profits increase because of quality improvements made in 2017, assuming all reductions in quality costs are attributable to quality improvements?