Iona Company, a large printing company, is in its fourth year of a 5-year, quality improvement program.

Question:

Iona Company, a large printing company, is in its fourth year of a 5-year, quality improvement program. The program began in 2003 with an internal study that revealed the quality costs being incurred. In that year, a 5-year plan was developed to lower quality costs to 10 percent of sales by the end of 2007. Sales and quality costs for each year are as follows:

image text in transcribed

The detail of the 2007 budget for quality costs is also provided.

image text in transcribed

All prevention costs are fixed; all other quality costs are variable.
During 2007, the company had $$12$ million in sales. Actual quality costs for 2006 and 2007 are as follows:

image text in transcribed

Required:
1. Prepare an interim quality cost performance report for 2007 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 1-period quality performance report for 2007 that compares the actual quality costs of 2006 with the actual costs of 2007. 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 2003 through 2007. 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 5-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.