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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 14, Problem 11DQ
Textbook Problem
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If a firm’s annual sales are $200 million, what percentage of sales should be spent on quality costs? Suppose that the firm is spending 18 percent of sales on quality costs. What is the potential savings from quality improvement?

To determine

Identify the percentage of sales spent on quality costs and Identify the potential savings from quality improvements.

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;

  1. 1. “Prevention costs”.
  2. 2. “Appraisal costs”.
  3. 3. “Internal failure costs”.
  4. 4. “External failure costs”.

“Identify the percentage of sales spent on quality costs”:

  • Organizations must spend nearly 2.5 percent (Refer to note) of sales on quality costs.

“Identify the potential savings from quality improvements”:

  • The “potential savings” from quality improvement is (1) $31million.

Note: According to thumb rule the quality cost must not be more than 2.5 percent.

Working note:

(1)Calculate the potential savings from quality improvement:

Potential savings fromquality improvement}=[(Percentofsalesonqualitycosts×Annualsales)</

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Chapter 14 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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