At the Beginning of the Year, Nevermore, Inc

question 191

Essay

At the beginning of the year, Nevermore, Inc., 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:
Required:
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 2.0 percent of sales, how much additional profit would result?

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Definitions:

Average Variable Cost Curve

A graph that displays how the variable cost per unit changes with changes in output level.

Marginal Cost Curve

A graphical representation that shows how the cost of producing one more unit of a good varies as the production level increases.

Average Total Cost

The total cost of production divided by the quantity of output produced; it combines all fixed and variable costs per unit of output.

Total Fixed Costs

The cumulative sum of all costs that remain constant regardless of the level of production or output within a certain period.