iCover produces bags for carrying laptop computers. iCover sells 1,000,000 units each year at a price of $20 per unit and a contribution margin of 40%.

To respond to customer complaints, iCover's mangers want to modify the production processes to produce higher-quality products.

The current costs of quality are as follows:

Prevention costs..............................................$400,000

Appraisal costs................................................$150,000

Internal failure costs

Rework.........................................................$325,000

Scrap.............................................................$ 75,000

External failure costs

Product repair costs..........................................$400,000

Lost sales from customer returns...........................$650,000

The management accountant has forecast the following additional costs to modify the production process.

Design changes..............................................$125,000

Process engineering..........................................$210,000

Required:

1. Which costs of quality category are managers focusing on? Why?

2. If the improvements result in a 55% decrease in product repair costs and a 70% decrease in lost sales from customer returns, what is the impact on the overall COQ and the company's operating income? What should iCover do? Explain.

3. Calculate prevention, appraisal, internal failure, and external failure costs as a percentage of total quality costs and as a percentage of sales before and after the change in the production process. Comment briefly on your results.