In 2000, Danvers Company initiated a full-scale quality improvement program. At the end of the year, the president noted with some satisfaction that the defects per unit of product had dropped significantly compared to the prior year. She was also pleased that relation¬

ships with suppliers had improved and defective raw materials had declined. The new qual¬

ity training program was also well-accepted by employees. Of most interest to the presi¬

dent, however, was the impact 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 2000 and 2001 are given below 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 qualitycost categories? Explain.
2. Prepare a one-year trend performance report for 2001. How much have profits increased because of the quality improvements made by Danvers Company?
3. Estimate the additional improvement in profits if Danvers Company ultimately reduces Its quality costs to 2.5% of sales revenues (assume sales of $25 million).

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2000 2001 Sales $20,000,000 $25,000,000 Appraisal costs: Product inspection 800,000 750,000 Raw material inspection 100,000 70,000 Prevention costs: Quality training 10,000 100,000 Quality reporting 5,000 50,000 Quality improvement projects 5,000 250,000 Internal failure costs: Scrap 700,000 600,000 Rework 900,000 800,000 Yield losses 400,000 250,000 Retesting 500,000 400,000 External failure costs: Returned materials 400,000 400,000 Allowances 300,000 350,000 Warranty 1,000,000 1,100,000