Paper Products Division produces paper diapers, napkins, and paper towels. The divisional manager has decided that quality costs can be minimized by distributing quality costs evenly among the four quality categories and reducing them to no more than 5 percent of sales. He has just received the following quality cost report:

Assume that all prevention costs are fixed and that the remaining quality costs are variable (unit-level).

Required:
1. Assume that the sales revenue for the year totaled $2 million, with sales for each product as follows: diapers, $1 million; napkins, $600,000; paper towels, $400,000. Evaluate the distribution of costs for the division as a whole and for each product line. What recommendations do you have for the divisional manager?
2. Now, assume that total sales are $1 million and have this breakdown: diapers, $500,000; napkins, $300,000; paper towels, $200,000. Evaluate the distribution of costs for the division as a whole and for each product line in this case. Do you think it is possible to reduce the quality costs to 5 percent of sales for each product line and for the division as a whole and, simultaneously, achieve an equal distribution of the quality costs? What recommendations do you have?
3. Assume total sales of $1 million with this breakdown: diapers, $500,000; napkins, $180,000; paper towels, $320,000. Evaluate the distribution of quality costs. What recommendations do you have for the divisional manager?
4. Discuss the value of having quality costs reported bysegment.

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Paper Products Division Quality Cost Report For the Year Ended December 31, 2010 Paper Diapers Napkins Towels Total Prevention costs: 1 Quality training Quality engineering Quality audits Quality reporting S 3,000 2,500 2,000 S7,500 7,000 1,500 5,500 S 9,000 6,000 6,500 21,500 1,000 500 2,000 2,500 1,000 1,000 3,500 2,500 Total prevention costs Appraisal c osts Inspection, materials Process acceptance Product acceptance S 2,000 3,000 3,000 S8,000 8,000 5,500 S 8,000 7,000 6,500 21,500 4,000 2,000 2,800 ,200 1,200 Total appraisal costs Internal failure costs: Scrap Disposal costs Downtime S10,000 3,000 2,500 15,500 10,500 5,000 Total internal failure costs $18,000 6,500 6,500 31,000 7,000 1,000 2,000 1,500 1,500 2,500 External failure costs: Allowances Customer complaints Product liability S10,000 3,000 2,750 15,750 9,250 1,000 Total external failure costs 15,000 4,500 6,500 $ 26,000 S50,000 $24,000 S26,000 $100,000 4,000 1,000 1,500 3,750 Total quality costs