Cost of goods sold 6500000 Required Calculate by how much profits would

# Cost of goods sold 6500000 required calculate by how

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Cost of goods sold 6,500,000 Required : 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%) = \$835,000 192. 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: 2016 2017 Sales \$1,000,000 \$1,500,000 Scrap 30,000 37,500 Rework 40,000 25,000 Training program 10,000 12,000 Consumer complaints 20,000 12,500 Lost sales, incorrect labeling 16,000 -- Test labor 24,000 20,000 Inspection labor 50,000 60,000 Supplier evaluation 30,000 26,000 Exceptional'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: Scrap 15% Training 20% Supplier evaluation 25% Test labor 25% Inspection 15% Total quality costs 100% 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 Management ANSWER: a. Long-Range Performance Report Exceptional Foods For the Year Ended December 31, 2015 Actual Costs* Long-Range 2017 Target Costs** Variance Prevention costs: Training program \$ 12,000 \$ 7,500 \$ 4,500 U Supplier evaluation 26,000 9,375 16,625 U Total prevention \$ 38,000 \$16,875 \$ 21,125 U Appraisal costs: Test labor \$ 20,000 \$ 9,375 \$ 10,625 U Inspection labor 60,000 5,625 54,375 U Total appraisal \$ 80,000 \$15,000 \$ 65,000 U Internal failure costs: Scrap \$ 37,500 \$ 5,625 \$ 31,875 U Rework 25,000 -0- 25,000 U Total internal failure \$ 62,500 \$ 5,625 \$ 56,875 U External failure costs: Consumer complaints \$ 12,500 \$ -0- \$ 12,500 U Lost sales, labeling -0- -0- -0- Total external failure \$ 12,500 \$ -0- \$ 12,500 U Total quality costs \$193,000 \$37,500 \$155,500 U Percent of Actual Sales 12.9% 2.5% 10.4% *Based on sales of \$1,500,000. ** for year 2017 b. 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 Management 193. 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: 2016 2017 Sales \$125,000 \$150,000 Scrap 3,750 3,750 Rework 5,000 2,500 Training program 1,250 1,500 Consumer complaints 2,500 1,250 Lost sales, incorrect labeling 2,000 -- Test labor 3,000 2,000 Inspection labor 6,250 6,000 Supplier evaluation 3,750 3,250 Required : 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?