In 2007, Major Company initiated a full-scale, quality improvement program. At the end of the year, Jack Aldredge, the president, noted with some satisfaction that the defects per unit of product had dropped significantly compared to the prior year. He was also pleased that relationships with suppliers had improved and defective materials had declined. The new quality training program was also well accepted by employees.

Of most interest to the president, 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 2006 and 2007 are as follows by quality category:

All prevention costs are fixed (by discretion). Assume all other quality costs are unitlevel 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 quality cost categories? Explain.
2. Prepare a 1-year trend performance report for 2007 (compare the actual costs of 2007 with those of 2006, adjusted for differences in sales volume). How much have profits increased because of the quality improvements made by Major Company?
3. Estimate the additional improvement in profits if Major Company ultimately reduces its quality costs to 2.5 percent of sales revenues (assume sales of \($25\) million).

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2006 2007 Sales Appraisal costs: $8,000,000 $10,000,000 Packaging inspection Product acceptance Prevention costs: 320,000 300,000 40,000 28,000 Quality circles 4,000 40,000 Design reviews 2,000 20,000 Quality improvement projects 2,000 100,000 Internal failure costs: Scrap 280,000 240,000 Rework 360,000 320,000 Yield losses 160,000 100,000 Retesting 200,000 160,000 External failure costs: Returned materials 160,000 160,000 Allowances 120,000 140,000 Warranty 400,000 440,000