19-19 Costs of quality, quality improvement. Cell Design produces cell phone covers for all makes and models of cell phones. Cell Design sells 1,050,000 units each year at a price of $10 per unit and a contribution margin of 40%. A survey of Cell Design customers over the past 12 months indicates that customers were very satis- fied with the products but a disturbing number of customers were disappointed because the products they purchased did not fit their phones. They then had to hassle with returns and replacements. Cell Design's managers want to modify their production processes to develop products that more closely match Cell Design's specifications because the quality control in place to prevent ill-fitting products from reaching customers is not working very well. The current costs of quality are as follows: Prevention costs Appraisal costs Internal failure costs Rework $210,000 $100,000 $420,000 $ 21,000 Scrap External failure costs Product replacements $315,000 Lost sales from customer returns $787,500 The QC manager and controller have forecast the following additional costs to modify the production process. CAD design improvement $150,000 $137,500 Improve machine calibration to specifications 1. Which cost of quality category are managers focusing on? Why? 2. If the improvements result in a 60% decrease in customer replacement cost and a 70% decrease in customer returns, what is the impact on the overall COQ and the company's operating income? What should Cell Design do? Explain. Required