The following information pertains to Molotov, Inc., for the current year: $\begin{array}{lr}
\text { Sales } & \$ 20,000,000 \
\text { Internal failure costs } & 600,000 \
\text { External failure costs } & 400,000 \
\text { Appraisal costs } & 250,000 \
\text { Prevention costs } & 100,000 \
\text { Cost of goods sold } & 10,000,000
\end{array}$ If quality costs were reduced to 2.5 percent of sales, profits would increase by
A)$1,000,000.
B)$850,000.
C)$500,000.
D)$250,000.

Question

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 $600,000 + $400,000 + $250,000 + $100,000 = $1,350,000. If quality costs were reduced to 2.5% of sales, the new quality costs would be 2.5% of $20,000,000 = $500,000. The reduction in costs, and thus the increase in profits, would be the difference between the current quality costs and the new quality costs: $1,350,000 - $500,000 = $850,000.

The Following Information Pertains to Molotov, Inc If Quality Costs Were Reduced to 2