Elijah Electronics makes wireless headphone sets. The firm produced 27,000 wireless headphone sets during its first year of operation. At year-end, it had no inventory of finished goods. Elijah sold 25,380 units through regular market channels, but 270 of the units produced were so defective that they had to be sold as scrap. The remaining units were reworked and sold as seconds. For the year, the firm spent $144,000 on prevention costs and $72,000 on quality appraisal. There were no customer returns. An income statement for the year follows. Sales Regular channel $5,076,000 Seconds 128,250 Scrap 9,450 $5,213,700 Cost of goods sold Original production costs $1,725,840 Rework costs 37,800 Quality prevention and appraisal 216,000 $1,979,640 Gross margin $3,234,060 Selling and administrative expenses (all fixed) 882,000 Profit before income taxes $2,352,060 Compute the total pre-tax profit lost by the company in its first year of operations by selling defective units as seconds or as scrap rather than selling the units through regular channels. $ Compute the total failure cost for the company in its first year. $ Compute total quality cost incurred by the company in its first year. $

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Elijah Electronics makes wireless headphone sets. The firm produced 27,000 wireless headphone sets during its first year of operation. At year-end, it had no inventory of finished goods. Elijah sold 25,380 units through regular market channels, but 270 of the units produced were so defective that they had to be sold as scrap. The remaining units were reworked and sold as seconds. For the year, the firm spent $144,000 on prevention costs and $72,000 on quality appraisal. There were no customer returns. An income statement for the year follows.

Sales
Regular channel	$5,076,000
Seconds	128,250
Scrap	9,450	$5,213,700
Cost of goods sold
Original production costs	$1,725,840
Rework costs	37,800
Quality prevention and appraisal	216,000	$1,979,640
Gross margin		$3,234,060
Selling and administrative expenses (all fixed)		882,000
Profit before income taxes		$2,352,060

Compute the total pre-tax profit lost by the company in its first year of operations by selling defective units as seconds or as scrap rather than selling the units through regular channels. $
Compute the total failure cost for the company in its first year. $
Compute total quality cost incurred by the company in its first year. $

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