Answered: o customer returns. An income statement…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Elijah Electronics makes wireless headphone sets. The firm produced 58,500 wireless headphone sets during its first year of operation. At year-end, it had no inventory of finished goods. Elijah sold 54,990 units through regular market channels, but 585 of the units produced were so defective that they had to be sold as scrap. The remaining units were reworked and sold as seconds. For the year, the firm spent $312,000 on prevention costs and $156,000 on quality appraisal. There were no customer returns. An income statement for the year follows. (See attached)

a. Compute the total pre-tax profit lost by the company in its first year of operations by selling defective units as seconds or as scrap rather than selling the units through regular channels. $______

b. Compute the total failure cost for the company in its first year. $______

c. Compute total quality cost incurred by the company in its first year. $______

Sales
Regular channel
$10,998,000
Seconds
277,875
Scrap
20,475 $11,296,350
Cost of goods sold
Original production costs
$3,739,320
Rework costs
81,900
Quality prevention and appraisal
468,000 $4,289,220
Gross margin
$7,007,130
Selling and administrative expenses (all fixed)
1,911,000
Profit before income taxes
$5,096,130

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