The president of Cardio Care Exercise Equipment Co. has been concerned about the growth in costs over the last several years. The president asked the controller to perform an activity analysis to gain a better insight into these costs. The activity analysis revealed the following:

The production process is complicated by quality problems, requiring the production manager to expedite production and dispose of scrap.

1. Prepare a Pareto chart of the company activities.

2. Use the activity cost information to determine the percentages of total costs that are prevention, appraisal, internal failure, external failure, and not costs of quality.

3. Determine the percentages of total costs that are value- and non-value-added.

4. Interpret the information.

Activities Correcting invoice errors Disposing of incoming materials with poor quality Disposing of scrap Expediting late production Final inspection Inspecting incoming materials Inspecting work in process Preventive machine maintenance Producing product Responding to customer quality complaints Total Activity Cost $ 7,200 21,600 43,200 36,000 28,800 7,200 32,400 21,600 140,400 21,600 $360,000