classify the costs as prevention appraisal internal failure or external failure 649543

QUALITY COST CLASSIFICATION, QUALITY IMPROVEMENT, AND PROFITABILITY

At the beginning of the year, Kare Company initiated a quality improvement program. Considerable effort was expended to reduce the number of defective units produced. By the end of the year, reports from the production manager revealed that scrap and rework had both decreased. The president of the company was pleased to hear of the success but wanted some assessment of the financial impact of the improvements. To make this assessment, the following financial data were collected for the current and preceding years:

 

Preceding Year (2006)

Current Year (2007)

Sales

$10,000,000

$10,000,000

Scrap

400,000

300,000

Rework

600,000

400,000

Product inspection

100,000

125,000

Product warranty

800,000

600,000

Quality training

40,000

80,000

Materials inspection

60,000

40,000

Required:

1. Classify the costs as prevention, appraisal, internal failure, or external failure.

2. Compute quality cost as a percentage of sales for each of the two years. By how much has profit increased because of quality improvements? Assuming that quality costs can be reduced to 2.5 percent of sales, how much additional profit is available through quality improvements (assume that sales revenues will remain the same)?