Quality Improvement and Profitability Objective Gagnon Company reported the following sales and quality costs for the past
Question:
Quality Improvement and Profitability Objective
Gagnon Company reported the following sales and quality costs for the past four years. Assume that all quality costs are variable and that all changes in the quality cost ratios are due to a quality improvement program.
Year | Sales Revenues | Quality Costs as a Percent of Revenues |
1 | $9,120,000 | 30% |
2 | 9,920,000 | 27 |
3 | 11,600,000 | 23 |
4 | 14,200,000 | 19 |
Assume that Gagnon produces one type of product, which is sold on a bid basis. In Years 1 and 2, the average bid was $200. In Year 1, total variable costs were $120.00 per unit. In Year 3, competition forced the bid to drop to $160.00.
Do not round the intermediate calculations and round your final answers to the nearest dollar.
Compute the total contribution margin in Year 3 assuming the same quality costs as in Year 1.
$
Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3.
$
What is the increase in profitability resulting from the quality improvements made from Year 1 to Year 3?
$
Engineering Economy
ISBN: 978-0132554909
15th edition
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling