At the Beginning of the Year, Custom Choppers Company Initiated

question 73

Essay

At the beginning of the year, Custom Choppers Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

a. Compute each category of quality costs as a percentage of sales for each year.
Prevention costs Appraisal costs Internal failure costs External failure costs
b. How much has profit increased as a result of quality improvements?
c. If quality costs can be reduced to 2.5 percent of sales, how much additional profit would result?

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Definitions:

Number Of Employees

The total count of individuals employed by a company or organization, regardless of their employment status (full-time, part-time, etc.).

Activity-Based Costing

A costing methodology that assigns overhead and indirect costs to specific activities, providing more accurate product or service costs.

Activity Cost Pools

These are groupings of individual costs, based on the activities that drive costs in an organization, which are used in activity-based costing to allocate costs more accurately.

Machine-Hours

A measure of production time, quantifying the number of hours machines are operating in the manufacturing process.