Question

Quality Costs: Profit Improvement and Distribution Across Categories, Gainsharing

Muskogee Company had sales of $60,000,000 in 20x1. In 20x5, sales had increased to $75,000,000. A quality improvement program was implemented at the beginning of 20x1. Overall conformance quality was targeted for improvement. The quality costs for 20x1 and 20x5 follow. Assume any changes in quality costs are attributable to improvements in quality.

	20x1		20x5
Internal failure costs	$4,500,000		$225,000
External failure costs	6,000,000		150,000
Appraisal costs	2,700,000		562,500
Prevention costs	1,800,000		937,500
Total quality costs	$15,000,000		$1,875,000

2. Calculate the relative distribution of costs by category for 20x1. Enter your answers as whole percentage values (for example, 6% would be entered as "6").

Internal failure		%
External failure		%
Appraisal		%
Prevention		%

Answer 1

The distribution of cost should be made on percentage of sale of 20x1.

Internal failure = (20x1 cost / 20x1 sale) × 100

                        = ($4,500,000 / $60,000,000) × 100

                        = 7.5%

                        = 8 % (as whole percentage value)

                        = 8 (Answer)

External failure = (20x1 cost / 20x1 sale) × 100

                        = ($6,000,000 / $60,000,000) × 100

                        = 10%

                        = 10 (Answer)

Appraisal = (20x1 cost / 20x1 sale) × 100

                        = ($2,700,000 / $60,000,000) × 100

                        = 4.5%

                        = 5 % (as whole percentage value)

                        = 5 (Answer)

Prevention = (20x1 cost / 20x1 sale) × 100

                        = ($1,800,000 / $60,000,000) × 100

                        = 3%

                        = 3 (Answer)