Luna Company is a printing company and a subsidiary of a large publishing company. Luna is in its fourth year of a 5-year, quality improvement program. The program began in 20X1 as a result of a report by a consulting firm that revealed that quality costs were about 20% of sales. Concerned about the level of quality costs, Luna's top management began a 5-year plan in 20X1 with the objective of lowering quality costs to 10% of sales by the end of 20X5. Sales and quality costs for each year are as follows:

Sales Revenues Quality Costs

20X1...............$30,000,000.....................$6,000,000

20X2.................30,000,000.......................5,400,000

20X3.................33,000,000.......................5,445,000

20X4.................33,857,000.......................4,740,000

20X5.................36,000,000.......................3,960,000

Quality costs by category are expressed as a percentage of sales as follows:

The detail of the 20X5 budget for quality costs is also provided.
Quality planning...........................................$ 450,000
Quality training...............................................180,000
Quality improvement (special project) ...................430,000
Quality reporting.............................................260,000
Proofreading..................................................860,000
Other inspection..............................................480,000
Correction of typos..........................................375,000
Plate revisions.................................................125,000
Press downtime...............................................221,000
Waste (because of poor work) .............................125,000
Returns/allowances..........................................450,000
Lost sales......................................................235,000
Rework (because of customer complaints) ...............195,000
Total quality costs.........................................$4,386,000
Actual quality costs for 20X4 and 20X5 are as follows:

Required:
1. Prepare an interim quality cost performance report for 20X5 that compares actual quality costs with budgeted quality costs. Comment on the firm's ability to achieve its quality goals for the year.
2. Prepare a single-period quality performance report for 20X5 that compares the actual quality costs of 20X4 with the actual costs of 20X5. How much did profits change because of improved quality?
3. Prepare a graph that shows the trend in total quality costs as a percentage of sales since the inception of the quality improvement program.
4. Prepare a graph that shows the trend for all four quality cost categories for 20X1 through 20X5. How does this graph help management know that the reduction in total quality costs is attributable to quality improvements?
5. Assume that the company is preparing a second 5-year plan to reduce quality costs to 2.5% of sales. Prepare a long-range quality cost performance report that compares the costs for 20X5 with those planned for the end of the second 5-year period. Assume sales of $45 million at the end of 5 years. The final planned relative distribution of quality costs is as follows: proofreading, 50%; other inspection, 13%; quality training, 30%; and quality reporting, 7%. Assume that all prevention costs are fixed and all other costs are variable (with respect to sales).

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Prevention Appraisal Internal Failue External Failure 20X1 20X2 20X3 20X4 20X5 1.0% 2.0 2.5 3.0 3.5 2.0 % 10.0 % 6.0 4.0 3.5 2.0 6.0 3.5 2.0 3.5 Quality planning Quality training Special project Quality reporting Proofreading Oth Correction of typos Plate revisions Press downtime Waste Returns/allowances Lost salcs Rework 20X5 $450,000 160,000 390,000 260,000 800,000 460,000 350,000 100,000 200,000 70,000 400,000 200,000 120,000 20X4 $440,000 250,000 150,000 240,000 860,000 580,000 200,000 380,000 260,000 120,000 620,000 330,000 310,000 er inspection