Iona Company, a large printing company, is in its fourth year of a five-year, quality improvement program. The program began in 2007 with an internal study that revealed the quality costs being incurred. In that year, a five-year plan. was developed to lower quality costs to 10 percent of sales by the end of 2011. Sales and quality costs for each year are as follows:

All prevention costs are fixed; all other quality costs are variable.
During 2011, the company had $12 million in sales. Actual quality costs for 2010 and 2011 are as follows:

Required:
1. Prepare an interim quality cost performance report for 2011 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 one-period quality performance report for 2011 that compares the actual quality costs of 2010 with the actual costs of 2011. 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 2007 through 2011. 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 five-year plan to reduce quality costs to 2.5 percent of sales. Prepare a long-range quality cost performance report assuming sales of $15 million at the end of five years. Assume that the final planned relative distribution of quality costs is as follows: proofreading, 50 percent; other inspection, 13 percent; quality training, 30 percent; and quality reporting, 7 percent.LO1

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2007 Sales Revenues Quality Costs 2008 2009 2010 2011* $10,000,000 $2,000,000 10,000,000 1,800,000 11,000,000 1,815,000 12,000,000 1,680,000 12,000,000 1,320,000 *Budgeted figures. Quality costs by category are expressed as a percentage of sales as follows: Prevention Appraisal Internal Failure External Failure 2007 1.0% 3.0% 7.0% 9.0% 2008 2.0 4.0 6.0 6.0 2009 2.5 4.0 5.0 5.0 2010 3.0 3.5 4.5 3.0 2011 3.5 3.5 2.0 2.0 The detail of the 2011 budget for quality costs is also provided.