The following information pertains to Longhorn Company for the current year: $$\begin{array} { l r }
\text { Sales } & \$ 1,000,000 \
\text { Internal failure costs } & 125,000 \
\text { External failure costs } & 50,000 \
\text { Appraisal costs } & 35,000 \
\text { Prevention costs } & 25,000 \
\text { Cost of goods sold } & 375,000
\end{array}$$ If quality costs were reduced to 2.5 percent of sales, profits would increase by
A)$25,000.
B)$125,000.
C)$180,000.
D)$210,000.

Question

The following information pertains to Longhorn Company for the current year: $$\begin{array} { l r } 
\text { Sales } & \$ 1,000,000 \
\text { Internal failure costs } & 125,000 \
\text { External failure costs } & 50,000 \
\text { Appraisal costs } & 35,000 \
\text { Prevention costs } & 25,000 \
\text { Cost of goods sold } & 375,000
\end{array}$$ If quality costs were reduced to 2.5 percent of sales, profits would increase by
A)$25,000.
B)$125,000.
C)$180,000.
D)$210,000.

Quizplus · Accepted Answer

The total current quality costs are the sum of internal failure costs, external failure costs, appraisal costs, and prevention costs, which equals $125,000 + $50,000 + $35,000 + $25,000 = $235,000. If quality costs were reduced to 2.5% of sales ($1,000,000), the new quality costs would be $1,000,000 * 2.5% = $25,000. The reduction in quality costs would be $235,000 - $25,000 = $210,000, which would directly increase profits by the same amount.

The Following Information Pertains to Longhorn Company for the Current