LY Ltd makes foldable grocery bags (encrusted with jewellery) for fashion-conscious environmentalists. Mandy, the general manager, recently attended a conference on quality and productivity, where she learned that many firms had introduced quality improvement programmes, resulting in significantly increased profitability. Some firms had reduced quality costs from 25% of sales to 2% of sales.

Mandy was enthused by the potential for improved quality performance ("If this works, I could get a whopper bonus this year!" she thought). Mandy contacted her management accountant (Angela), and requested an estimate of the total quality costs being incurred by LY, as well as a breakdown of those costs into four categories: Prevention; Appraisal; Internal failure; and External failure. Angela gathered the following information from 2019:

i. Sales revenue is $20,000,000 and net profit is $4,000,000

ii. 6,000 bags were returned by customers for repair. Repair costs are $70 per bag.

iii. Ten inspectors (who only do final inspections) each receive a salary of $30,000.

iv. 30,000 bags are rejected on final inspection each year (on average), due to quality issues. Of these, 80% can be reworked at a cost of $30 per unit. The remaining 20% have to be scrapped, costing $150 per bag on average.

v. A customer cancelled an order that would have increased profits by $500,000. The reason given was poor product performance. The marketing department of LY agreed that other customers have felt the same, and that roughly this amount is lost every year for similar reasons.

vi. Eight full-time employees are employed in the complaint department, on salaries of $35,000 each.

vii. LY gave sales allowances totalling $250,000 due to substandard products being sent to customers.

viii. All new employees at LY have to participate in a three-hour quality training programme. The estimated annual cost of the program is $160,000. ix. Inspection of the final product also requires testing equipment, which costs $240,000 every year to operate and maintain.

Discuss the distribution of quality costs among the four categories. Do you think this distribution is ideal? If not, where would you like to see changes to the distribution and why?

Provide at least 3 specific suggestions as to how LY could improve overall quality and also reduce total quality costs.

(I have already done a quality cost report and classified the costs by category. Please see attached.)