In 2006, Style, SA AClassify Each Cost as Variable or Fixed with Respect to the End

question 47

Essay

In 2006, Style, SA., instituted a quality improvement program. At the end of 2007, the management of the company requested a report to show the amount saved by the measures taken during the year. The actual sales and actual quality costs for 2006 and 2007 are as follows: $$\begin{array} { l r r } &2006&2007\\\text { Sales } & £ 125,000 & £ 150,000 \\\text { Scrap } & 3,750 & 3,750 \\\text { Rework } & 5,000 & 2,500 \\\text { Training program } & 1,250 & 1,500 \\\text { Consumer complaints } & 2,500 & 1,250 \\\text { Lost sales, incorrect labeling } & 2,000 & - \\\text { Test labour } & 3,000 & 2,000 \\\text { Inspection labour } & 6,250 & 6,000 \\\text { Supplier evaluation } & 3,750 & 3,250\end{array}$$
a.Classify each cost as variable or fixed with respect to sales and compute the variable cost ratio. Be careful-costs may change because of quality improvement, not cost behaviour.
b.How much did profits increase because of quality improvements made in 2007, assuming all reductions in quality costs are attributable to quality improvements?

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Definitions:

Manufacturing Arrangement

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