The following information pertains to Aquamarine, Inc., for the current year: $$\begin{array} { l r }
\text { Sales } & \$ 1,500,000 \
\text { Internal failure costs } & 150,000 \
\text { External failure costs } & 90,000 \
\text { Appraisal costs } & 50,000 \
\text { Prevention costs } & 30,000 \
\text { Cost of goods sold } & 600,000
\end{array}$$ If quality costs were reduced to 2 percent of sales, profits would increase by:

Question

The following information pertains to Aquamarine, Inc., for the current year: $$\begin{array} { l r } 
\text { Sales } & \$ 1,500,000 \
\text { Internal failure costs } & 150,000 \
\text { External failure costs } & 90,000 \
\text { Appraisal costs } & 50,000 \
\text { Prevention costs } & 30,000 \
\text { Cost of goods sold } & 600,000
\end{array}$$ If quality costs were reduced to 2 percent of sales, profits would increase by:

Quizplus · Accepted Answer

The total quality costs are the sum of internal failure costs, external failure costs, appraisal costs, and prevention costs, which equals $150,000 + $90,000 + $50,000 + $30,000 = $320,000. If quality costs were reduced to 2% of sales, the new quality costs would be 2% of $1,500,000 = $30,000. The reduction in quality costs would be $320,000 - $30,000 = $290,000, which would directly increase profits by the same amount.

The Following Information Pertains to Aquamarine, Inc If Quality Costs Were Reduced to 2 Percent of Sales