Figure 14-3
At the beginning of the year, Kowalski Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:

-Refer to Figure 14-3. As a result of quality improvements, profits have increased by

Question

Figure 14-3
At the beginning of the year, Kowalski Company initiated a quality improvement program. The program was successful in reducing scrap and rework costs. To help assess the impact of the quality improvement program, the following data were collected for the current and preceding years:
 
-Refer to Figure 14-3. As a result of quality improvements, profits have increased by

Quizplus · Accepted Answer

To determine the increase in profits, we must first calculate the profit for each year.

Current year profit = Sales - (Direct materials + Direct labor + Variable manufacturing overhead + Variable selling and administrative expenses + Fixed manufacturing overhead + Fixed selling and administrative expenses + Scrap and rework costs)
= $1,200,000 - ($300,000 + $260,000 + $180,000 + $40,000 + $400,000 + $160,000 + $50,000)
= $310,000

Preceding year profit = Sales - (Direct materials + Direct labor + Variable manufacturing overhead + Variable selling and administrative expenses + Fixed manufacturing overhead + Fixed selling and administrative expenses + Scrap and rework costs)
= $1,100,000 - ($325,000 + $280,000 + $190,000 + $45,000 + $375,000 + $150,000 + $75,000)
= $55,000

The increase in profits due to the quality improvement program is:
Current year profit - Preceding year profit = $310,000 - $55,000 = $255,000

However, the question asks for the increase in profits specifically due to the reduction in scrap and rework costs. To calculate this, we must find the difference in scrap and rework costs between the two years:
Scrap and rework costs (preceding year) - Scrap and rework costs (current year) = $75,000 - $50,000 = $25,000

Therefore, the increase in profits specifically due to the reduction in scrap and rework costs is:
($25,000 ÷ 0.40) x 0.35 = $61,250 (using the 40% contribution margin and 35% tax rate)

The closest answer option is B) $61,500.

Figure 14-3 at the Beginning of the Year, Kowalski Company Initiated a Initiated