Quality Improvement and Profitability Objective

Ming 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	25%
2	44,000,000	22
3	44,000,000	18
4	48,000,000	14

quality costs for all four years are as follows

year 1 $10,000,000

year 2 $9,680,000

year 3 $7,920,000

year 4 $6,720,000

Assume that Ming produces one type of product, which is sold on a bid basis. In Years 1 and 2, the average bid was $400. In Year 1, total variable costs were $250 per unit. In Year 3, competition forced the bid to drop to $320.

In your calculations, round units to whole numbers.

Compute the total contribution margin in Year 3 assuming the same percentage of quality costs as in Year 1. $???

Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3. $???

What is the increase in profitability resulting from the quality improvements made from Year 1 to Year 3? $???