In 1997, Milton Thayne, president of Carbondale Electronics, received a report indicating that quality costs were 31% of sales. Faced with increasing pressures from imported goods, Milton resolved to take measures to improve the overall quality of the company's products.

After hiring a consultant, in 1998 the company began an aggressive program of total qual¬

ity control. At the end of 2001, Milton requested an analysis of the progress the company had made in reducing and controlling quality costs. The Accounting Department assembled the following data:

Required:
1. Compute the quality costs as a percentage of sales by category and in total for each year.
2. Explain why quality costs increased in total and as a percentage of sales in 1998, the first year of the quality improvement program.
3. Prepare a multiple-year trend graph for quality costs, both by total costs and by cate¬
gory. Using the graph, assess the progress made in reducing and controlling quality costs. Does the graph provide evidence that quality has improved? Explain.
4. Using the 1997 quality cost relationships (assume all costs are variable), calculate the quality costs that would have prevailed in 2000. By how much did profits increase in 2000 because of the quality improvement program? Repeat for 2001.

Transcribed Image Text:

Internal External Sales Prevention Appraisal Failure Failure 1997 $500,000 $ 5,000 $10,000 $80,000 $60,000 1998 600,000 25,000 15,000 60,000 50,000 1999 700,000 35,000 30,000 35,000 25,000 2000 600,000 40,000 15,000 25,000 20,000 2001 500,000 50,000 5,000 12,000 8,000