The president of Healthy Heart Exercise Equipment Co. has been concerned about the growth in costs over the last several years. The president asked the controller to perform an activity analysis to gain a better insight into these costs. The activity analysis revealed the following:

Activity Activity Cost

Correcting invoice errors ................$ 15,000

Disposing of incoming materials with poor quality .....12,000

Disposing of scrap ....................39,000

Expediting late production ................33,000

Final inspection ...................24,000

Inspecting incoming materials ................6,000

Inspecting work in process .................30,000

Preventive machine maintenance .............18,000

Producing product ...................105,000

Responding to customer quality complaints .........18,000

Total .......................$ 300,000

The production process is complicated by quality problems, requiring the production manager to expedite production and dispose of scrap.

Instructions

1. Prepare a Pareto chart of the company activities.

2. Use the activity cost information to determine the percentages of total costs that are prevention, appraisal, internal failure, external failure, and not costs of quality.

3. Determine the percentages of total costs that are value- and non-value-added.

4. Interpret the information.