lost of quality) E. Hugh-Phones makes portable telephones and produced 20,000 of them during 2006, its first year of operations. It sold all it pro¬ duced that first year except 500 phones that had a particular defect. Of these, 200 were reworked and sold through regular channels at the original price; the rest were sold as “seconds” without rework. In 2006, E. Hugh- Phones spent $25,000 for prevention measures and $18,000 on appraisal. Following is E. Hugh’s 2006 income statement. It is a partnership; thus, no income taxes are presented on the income statement.

a. Compute the total profit lost by E. Hugh-Phones in its first year of oper¬ ations by selling defective units as seconds rather than reworking them and selling them at the regular price.

b. Compute the company’s total failure cost in 2006.
C. Compute the company’s total quality cost in 2006.

d. What evidence indicates that the firm is dedicated to manufacturing and selling high-quality products? LO.1

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Regular sales (19,700 units) Sales of seconds (300 units) Cost of goods sold Original production costs E. HUGH-PHONES Income Statement For Year Ended December 31, 2006 $3,940,000 42,000 $3,982,000 $1,600,000 Rework costs (200 units) 4,000 Prevention and appraisal costs 86,000 Gross margin (1,690,000) $2,292,000 Selling and administrative expenses (all fixed) (1,200,000) Net income $1,092,000