Coral Corporation Reported the Following Sales and Quality Costs for the Past

question 44

Essay

Coral Corporation 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. $\begin{array}{rrr}&&\text { Quality Costs as }\\\text { Year } & \text { Sales Revenues } & \text { Percent of Revenues }\\1 & \$ 4,000,000 & 22.0 \% \\2 & 4,200,000 & 20.0 \% \\3 & 4,400,000 & 18.0 \% \\4 & 4,800,000 & 15.0 \%\end{array}$
Required:
a.Compute the quality costs for all four years.
b.By what amount did net income increase from Year 1 to Year 2, from Year 2 to Year 3, and from Year 3 to Year 4 as a result of quality improvements?
c.The management of Ambrosia Corporation believes it is possible to reduce quality costs to 2.5 percent of sales. Assuming sales will continue at the Year 4 level, calculate the additional profit potential.

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Definitions:

Good Sold

A product that has been sold to a customer, transferring ownership from the seller to the buyer.

Binding Price Ceiling

A Binding Price Ceiling is a government-imposed limit on the price charged for a product or service that is set below the market equilibrium, leading to shortages.

Treadmills

Exercise equipment designed for walking or running in place, often used in fitness routines to improve cardiovascular health.

Shortage

An occurrence in which the need for a particular product or service surpasses the available amount in the market.