Lockhart Corporation manufactures auto parts for two leading Japanese automakers.

Janice Moore is the management accountant for one of Lockhart's largest manufacturing plants. The plant's general manager, Stan Miller has just returned from a meeting at corporate headquarters where quality expectations were outlined for 2017 Stan calls Janice into his office to relay the corporate quality objective that total quality costs will not exceed 99% of total revenues by plant under any circumstances. Stan asks Janice to provide him with a list of options for meeting corporate headquarters' quality objective.

The plant's initial budgeted revenues and quality costs for 2017 are as follows:

More information:

Prior to receiving the new corporate quality objective, Janice had collected information for all of the plant's possible options for improving both product quality and costs of quality. She was planning to introduce the idea of reengineering the manufacturing process at a one-time cost of $119,300, which would decrease product inspection costs by approximately 20% per year and was expected to reduce warranty repairs and customer support by an estimated 45% per year. After seeing the new corporate objective, Janice is reconsidering the re-engineering idea. Janice crunches the numbers again. By increasing the cost-of-quality control training for production staff by $27,400 per year, the company would reduce inspection costs by 10% annually and reduce warranty repairs and customer support costs by 40% per year as well. She is leaning toward only presenting this latter option to Stan because this is the only option that meets the new corporate quality objective.

Revenue	5,200,000
Quality Costs:
Testing of purchased materials	48,000
Quality Control training for production staff	7,800
Warranty repairs	120,000
Quality design engineering	70,000
Customer support	45,500
Materials scrap	10,000
Production inspection	134,000
Engineering redesign of failed parts	33,500
Rework of failed parts	26,000

Question:

1.	Calculate the ratio of each budgeted costs-of-quality category (prevention, appraisal, internal failure, and external failure) to budgeted revenues for 2017. Are the budgeted total costs of quality as a percentage of budgeted revenues currently less than 99%?
2.	Which of the two quality options should Janice propose to the generalmanager, Stan Miller? Show the 2-year outcome for each option: (a) re-engineer the manufacturing process for $119,300 and (b) increase quality training expenditure by $27,400 per year.
3.	Suppose Janice decides not to present the re-engineering option to Stan. Is Janice's action unethical? Explain.