Directions for question 3 (only ones needed)
3. First, compute the total contribution margin in year 3 given the quality costs in year 1.
Next, compute the total contribution margin in year 3 given the quality costs in year 3.
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 | $19,200,000 | 20% |
2 | 20,800,000 | 17 |
3 | 24,320,000 | 13 |
4 | 25,420,000 | 9 |
Required:
1. Compute the quality costs for all four years.
Quality Cost | |
Year 1 | $ |
Year 2 | $ |
Year 3 | $ |
Year 4 | $ |
By how much did net income increase from Year 1 to Year 2
because of quality improvements?
$
By how much did net income increase from Year 2 to Year 3
because of quality improvements?
$
By how much did net income increase from Year 3 to Year 4
because of quality improvements?
$
2. The management of Gagnon Company believes it
is possible to reduce quality costs to 2 percent of sales. Assuming
sales will continue at the Year 4 level, calculate the additional
profit potential facing Gagnon.
$
Is the expectation of improving quality and reducing costs to 2
percent of sales realistic?
Yes
3. Assume that Gagnon produces one type of product,
which is sold on a bid basis. In Years 1 and 2, the average bid was
$400. In Year 1, total variable costs were $240.00 per unit. In
Year 3, competition forced the bid to drop to $320.00.
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?
$
1.
Computation of quality costs and an increase in net profit:
Results of the excel sheet are as follows:
Note: The increase in net profit is the difference in costs as it shows the additional revenue.
2.
Computation of additional profit:
Yes, it is possible to achieve targets if the plans were implemented accurately.
3.
For year 3:
Computation of total contribution margin:
Computation of total contribution margin, using quality costs:
Computation of the increase in profitability from year 1 to year 3:
Directions for question 3 (only ones needed) 3. First, compute the total contribution margin in year 3 given the quality...
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