In 2010, Major Company initiated a full-scale, quality improvement program. At the end of the year, Jack Aldredge, the president, noted with some satisfaction that the defects per unit of product had dropped significantly compared to the prior year. He was also pleased that relationships with suppliers had improved and defective materials had declined. The new quality training program was also well accepted by employees. Of most interest to the president, however, was the effect of the quality improvements on profitability. To help assess the dollar impact of the quality improvements, the actual sales and the actual quality costs for 2009 and 2010 are as follows by quality category:

All prevention costs are fixed (by discretion). Assume all other quality costs are unit-level variable.

Required:
1. Compute the relative distribution of quality costs for each year. Do you believe that the company is moving in the right direction in terms of the balance among the quality cost categories? Explain.
2. Prepare a one-year trend performance report for 2010 (compare the actual costs of 2010 with those of 2009, adjusted for differences in sales volume). How much have profits increased because of the quality improvements made by Major Company?
3. Estimate the additional improvement in profits if Major Company ultimately reduces its quality costs to 2.5 percent of sales revenues (assume sales of $25million).

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2009 2010 Sales Appraisal costs: $8,000,000 10,000,000 Packaging inspection Product acceptance 320,000 40,000 300,000 28,000 Prevention costs: Quality circles Design reviews Quality improvement projects 4,000 2,000 2,000 40,000 20,000 100,000 Internal failure costs: Scrap Rework Yield losses Retesting 280,000 360,000 160,000 200,000 240,000 320,000 100,000 160,000 External failure costs: Rcturned materials Allowances Warranty 160,000 120,000 400,000 160,000 140,000 440,000