Paper Products Division produces paper diapers, napkins, and paper towels. The divisional manager as 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% 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 prod¬
uct as follows; diapers, $1 million; napkins, $600,000; towels, $400,000. Evaluate the dis¬
tribution of costs for the division as a whole and for each product line. What recom¬
mendations do you have for the divisional manager?
2. Now assume that total sales of $1 million have this breakdown: diapers, $500,000; nap¬
kins, $300,000; 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% of sales for each product line and for the division as a whole and, simultaneously, achieve an equal distribution of the quality costs? What recommenda¬
tions do you have?
3. Assume total sales of $1 million with this breakdown: diapers, $500,000; napkins, $180,000; towels, $320,000. Evaluate the distribution of quality costs. What recommen¬
dations do you have for the divisional manager?
4. Discuss the value of having quality costs reported by segment.

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Prevention costs: Paper Products Division Quality Cost Report For the Year Ending December 31, 2001 Diapers Napkins Towels Total Quality training $ 3,000 $ 2,500 $ 2,000 $ 7,500 Quality engineering 3,500 Quality audits Quality reporting 2,500 1,000 500 2,000 2,500 7,000 1,000 1,500 1,000 5,500 Total prevention costs $ 9,000 $ 6,000 $ 6,500 $ 21,500 Appraisal costs: Inspection, materials Process acceptance $ 2,000 $ 3,000 $ 3,000 8,000 4,000 2,800 Product acceptance 2,000 1,200 1,200 2,300 8,000 5,500 Total appraisal costs $ 8,000 $ 7,000 $ 6,500 $ 21,500 Internal failure costs: Scrap $10,000 $ 3,000 $ 2,500 $ 15,500 Disposal costs 7,000 Downtime 1,000 2,000 1,500 1,500 2,500 10,500 5,000 Total internal failure costs $18,000 $ 6,500 $ 6,500 $ 31,000 External failure costs: Allowances $10,000 $ 3,000 Customer complaints 4,000 1,500 $ 2,750 3,750 $ 15,750 9,250 Product liability 1,000 1,000 Total external failure costs $15,000 Total quality costs $50,000 $ 4,500 $24,000 $ 6,500 $26,000 $ 26,000 $100,000