Quality Improvement and Profitability Objective

Gagnon Company reported the following sales and quality costs for the past four years. Assume that all quality costs are variable and that all changes in the quality cost ratios are due to a quality improvement program.

Year	Sales Revenues	Quality Costs as a Percent of Revenues
1	$40,000,000	40%
2	44,500,000	37
3	44,500,000	33
4	47,100,000	29

Required:

a. By how much did net income increase from Year 2 to Year 3 because of quality improvements?

b. By how much did net income increase from Year 1 to Year 2 because of quality improvements?

c. By how much did net income increase from Year 3 to Year 4 because of quality improvements?

d. The management of Gagnon Company believes it is possible to reduce quality costs to 4 percent of sales. Assuming sales will continue at the Year 4 level, calculate the additional profit potential facing Gagnon