Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN: 9781305970663
Author: Don R. Hansen, Maryanne M. Mowen
Publisher: Cengage Learning
bartleby

Videos

Textbook Question
Book Icon
Chapter 14, Problem 13E

Gagnon Company 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.

Chapter 14, Problem 13E, Gagnon Company reported the following sales and quality costs for the past four years. Assume that

Required:

  1. 1. Compute the quality costs for all four years. By how much did net income increase from Year 1 to Year 2 because of quality improvements? From Year 2 to Year 3? From Year 3 to Year 4?
  2. 2. The management of Gagnon Company 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 facing Gagnon. Is the expectation of improving quality and reducing costs to 2.5 percent of sales realistic? Explain.
  3. 3. Assume that Gagnon produces one type of product, which is sold on a bid basis. In Years 1 and 2, the average bid was $400. In Year 1, total variable costs were $250 per unit. In Year 3, competition forced the bid to drop to $380. Compute the total contribution margin in Year 3 assuming the same quality costs as in Year 1. Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3. What is the increase in profitability resulting from the quality improvements made from Year 1 to Year 3?

1.

Expert Solution
Check Mark
To determine

Compute the quality costs for all four years and calculate the amount of increase in net income from year 1 to year 2, from year 2 to year 3, and from year 3 to year 4.

Explanation of Solution

Quality costs: Quality costs are costs that are incurred to avoid, identify and eliminate defects from products. Quality costs are classified into four components namely;

  • “Prevention costs”.
  • “Appraisal costs”.
  • “Internal failure costs”.
  • “External failure costs”.

Calculate the quality costs for all the four years:

YearPercent of revenues×Sales revenues=Quality costs
Year 125% $20,000,000  $5,000,000
year 222% $22,000,000  $4,840,000
Year 318% $22,000,000  $3,960,000
Year 414% $24,000,000  $3,960,000

Table (1)

Calculate the increase in net income from year 1 to year 2:

Increase in net income from year 1 to year 2}=[(Percentofrevenuesforyear1Percentofrevenuesforyear2)×Salesrevenueforyear2]=(25%22%)×$22,000,000=3%×$22,000,000=$660,000

Calculate the increase in net income from year 2 to year 3:

Increase in net income from year 2 to year 3}=[(Percentofrevenuesforyear2Percentofrevenuesforyear3)×Salesrevenueforyear3]=(22%18%)×$22,000,000=4%×$22,000,000=$880,000

Calculate the increase in net income from year 3 to year 4:

Increase in net income from year 3 to year 4}=[(Percentofrevenuesforyear3Percentofrevenuesforyear4)×Salesrevenueforyear4]=(18%14%)×$24,000,000=4%×$24,000,000=$960,000

2.

Expert Solution
Check Mark
To determine

Calculate the additional profit potential facing Company G and state whether expecting improved quality and reduced costs to 2.5 percent of sales is realistic.

Explanation of Solution

Calculate the profit potential:

Profitpotential=[(Percentofrevenuesforyear4Qualitycostreducedtopercentofsales)×Salesrevenuesforyear4]=[(14%2.5%)×$24,000,000]=11.5%×$24,000,000=$2,760,000

Therefore, from the above calculation, it is ascertained that amount of profit potential is $2,760,000.

The 2.5 percent goal is the level identified by several quality experts that a company must strive to obtain. The experience of company G shows that it is an achievable goal

3.

Expert Solution
Check Mark
To determine

Calculate the total contribution margin in year 3 assuming the same quality costs as in year 1 compute the total contribution margin in year 3 using the actual quality costs for year 3 and calculate the increase in profitability resulting from the quality improvements made from year 1 to year 3.

Explanation of Solution

Contribution Margin: The process or theory which is used to judge the benefit given by each unit of the goods produced is called as contribution margin.

Calculate the total contribution margin in year 3 assuming the same quality costs as in year 1 compute the total contribution margin in year 3 using the actual quality costs for year 3:

 Year 3-No changeYear 3-change
Sales$22,000,000 $22,000,000
Variable expenses(1)$14,473,684 (6)$11,764,210
Contribution margin$7,526,316$10,235,790

Table (2)

Calculate the increase in profitability:

Increaseinprofitability=(Contributionmarginforyear3usingyear1'squalitycostContributionmarginforyear3usingyear3'sactualcost)=($10,235,790$7,526,316)=$2,709,474

Therefore, the amount of increase in profitability is $2,709,474.

Working notes:

(1)Calculate the variable expenses in year 3 assuming the same quality costs as in year 1:

Variable expenses in year 3 assuming the same quality costs as in year 1}=[Totalvariablecostsperunit×(Salesrevenueduringyear3Dropofbid)]=[$250perunit×($22,000,000$380)]=$250perunit×$57,894.736=$14,473,684

(2)Calculate the quality cost per unit for year 1:

Quality cost per unit for year 1=Percentageofrevenue×Averagebid=25%×$400=$100

(3)Calculate the quality cost per unit for year 3:

Quality cost per unit for year 3=Percentageofrevenue×Dropofbid=14%×$380=$53.20

(4)Calculate the decrease in per-unit variable quality cost:

Decrease in per-unit variable quality cost}=(Qualitycostperunityear1Qualitycostperunityear2)=$100(2)$53.20(3)=$46.80

(5)Calculate the decrease in per-unit total variable cost:

Decrease in per-unit total variable cost}=(TotalvariablecostperunitDecreaseinper-unitvariablequalitycost)=$250$46.80(4)=$203.20

(6)Calculate the total variable cost for year 3:

Total variable cost for year 3=[Decreaseinper-unittotalvariablecost×(Salesrevenueforyear3Dropofbid)]=[$203.20(5)×($22,000,000$380)]=$11,764,210

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Gagnon Company 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 qual- ity improvement program. Quality Costs as a Percent of Revenues Year Sales Revenues 1 S20,000,000 25% 22,000,000 22,000,000 22 3 18 4 24,000,000 14 Required: 1. Compute the quality costs for all four years. By how much did net income increase from Year 1 to Year 2 because of quality improvements? From Year 2 to Year 3? From Year 3 to Year 4? 2. The management of Gagnon Company 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 facing Gagnon. Is the expectation of improving quality and reducing costs to 2.5 percent of sales realistic? Explain. 3. Assume that Gagnon produces one type of product, which is sold on a bid basis. In Years 1 and 2, the average bid was $400. In Year 1,…
How Can I resolve this problem? Walton Company has measured its quality costs for the past two years. After the company gathers its quality cost data, it summarizes those costs using the four categories shown below:  Required:  3. For this year, calculate the cost in each of the four categories as a percent of the total cost of quality. 4a. Calculate the change in total cost of quality over the two-year period.     Last Year   This Year   Prevention costs   $ 339,200   $ 637,000   Appraisal costs   $ 467,300   $ 496,000   Internal failure costs   $ 853,200   $ 545,000   External failure costs   $ 1,001,000   $ 734,400
At the end of Year 1, Cardigan Corporation implemented a new labor process and redesigned its product with the expectation that input usage efficiency would increase. Now, at the end of Year 2, the president of the company wants an assessment of the changes on the company's productivity. The data needed for the assessment are as follows:   Year 1 Year 2 Output 20,000 24,000 Output prices    $10       $10       Change in profits $22,200       Profit-linked measurements:         Materials $7,200     Labor  10,500     Power   (1,500) ​ What is the price-recovery component?   a. $6,000   b. $(6,000)   c. $22,200   d. $16,200

Chapter 14 Solutions

Cornerstones of Cost Management (Cornerstones Series)

Ch. 14 - If a firms annual sales are 200 million, what...Ch. 14 - Explain why it is important for a manager to...Ch. 14 - Prob. 13DQCh. 14 - Explain why the Accounting Department should be...Ch. 14 - Prob. 15DQCh. 14 - What is ecoefficiency?Ch. 14 - Prob. 17DQCh. 14 - Prob. 18DQCh. 14 - Prob. 19DQCh. 14 - What are the four categories of environmental...Ch. 14 - Prob. 21DQCh. 14 - What does full environmental costing mean? Full...Ch. 14 - What information is communicated by the unit...Ch. 14 - Evans Company had total sales of 3,000,000 for...Ch. 14 - Prob. 2CECh. 14 - Ross Company implemented a quality improvement...Ch. 14 - Nabors Company had actual quality costs for the...Ch. 14 - Verde Company reported operating costs of...Ch. 14 - Pinter Company had the following environmental...Ch. 14 - Rachel Boyce, president of a company that...Ch. 14 - Quality attributes such as performance and...Ch. 14 - Stahman, Inc., estimates its hidden external...Ch. 14 - Prob. 10ECh. 14 - Abernathy, Inc., produces two different generators...Ch. 14 - Kang Company reported sales of 3,240,000 in 20x5....Ch. 14 - Gagnon Company reported the following sales and...Ch. 14 - Muskogee Company had sales of 60,000,000 in 20x1....Ch. 14 - Javier Company has sales of 8 million and quality...Ch. 14 - In 20x4, Tru-Delite Frozen Desserts, Inc.,...Ch. 14 - Prob. 17ECh. 14 - Prob. 18ECh. 14 - Achieving sustainable development will likely...Ch. 14 - Classify the following environmental activities as...Ch. 14 - At the end of 20x5, Bing Pharmaceuticals began to...Ch. 14 - Prob. 22ECh. 14 - Coyle Pharmaceuticals produces two organic...Ch. 14 - Prob. 24ECh. 14 - Which of the following quality costs is an...Ch. 14 - Which of the following would be a hidden quality...Ch. 14 - Using the Taguchi quality loss function, an...Ch. 14 - Environmental costs are those costs incurred...Ch. 14 - Two products, Product A and Product B, are...Ch. 14 - Kathy Shorts, president of Oliver Company, was...Ch. 14 - Panguitch Company manufactures a component for...Ch. 14 - Gaston Company manufactures furniture. One of its...Ch. 14 - Classify the following quality costs as...Ch. 14 - Wayne Johnson, president of Banshee Company,...Ch. 14 - Recently, Ulrich Company received a report from an...Ch. 14 - In 20x5, Major Company initiated a full-scale,...Ch. 14 - Paper Products Division produces paper diapers,...Ch. 14 - In 2011, Milton Thayne, president of Carbondale...Ch. 14 - Iona Company, a large printing company, is in its...Ch. 14 - Prob. 40PCh. 14 - The following items are listed in an environmental...Ch. 14 - Refer to Problem 14.41. In the environmental...Ch. 14 - The following environmental cost reports for 20x3,...Ch. 14 - Refer to Problem 14.43. In 20x3, Jack Carter,...
Knowledge Booster
Background pattern image
Accounting
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.
Similar questions
SEE MORE QUESTIONS
Recommended textbooks for you
Text book image
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning
Text book image
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Text book image
Essentials of Business Analytics (MindTap Course ...
Statistics
ISBN:9781305627734
Author:Jeffrey D. Camm, James J. Cochran, Michael J. Fry, Jeffrey W. Ohlmann, David R. Anderson
Publisher:Cengage Learning
Text book image
Excel Applications for Accounting Principles
Accounting
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Cengage Learning
Inspection and Quality control in Manufacturing. What is quality inspection?; Author: Educationleaves;https://www.youtube.com/watch?v=Ey4MqC7Kp7g;License: Standard youtube license