Oaks Company has sales of $12,000,000 and quality costs of

Oaks Company has sales of $12,000,000 and quality costs of $2,400,000. The company is embarking on a major quality improvement program. During the next three years, Oaks intends to attack failure costs by increasing its appraisal and prevention costs. The “right” prevention activities will be selected, and appraisal costs will be reduced according to the results achieved. For the coming year, management is considering six specific activities: quality training, process control, product inspection, supplier evaluation, prototype testing, and redesign of two major products. To encourage managers to focus on reducing non-value-added quality costs and select the right activities, a bonus pool is established relating to the reduction of quality costs. The bonus pool is equal to 10 percent of the total reduction in quality costs.

Current quality costs and the costs of these six activities are given in the following table. Each activity is added sequentially so that its effect on the cost categories can be assessed. For example, after quality training is added, the control costs increase to $480,000, and the failure costs drop to $1,560,000. Even though the activities are presented sequentially, they are totally independent of each other. Thus, only beneficial activities need be selected.

Required:

1. Identify the control activities that should be implemented.

Calculate the total quality costs associated with this selection. Assume that an activity is selected only if it increases the bonus pool.

2. Given the activities selected in Requirement 1, calculate the following:

a. The expected reduction in total quality costs.

b. The expected percentage distribution for control and failure costs. Round your answers to the nearest whole percentage value (for example, 6% would be entered as “6”).

c. The expected amount for this year’s bonus pool.