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 2.5 percent of sales. Assuming sales will continue at the Year 4 level, calculate the additional profit potential facing Gagnon. 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 $250 per unit. In Year 3, competition forced the bid to drop to $320. In your calculations, round units to whole numbers. Compute the total contribution margin in Year 3 assuming the same percentage of quality costs as in Year 1. Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3.
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 2.5 percent of sales. Assuming sales will continue at the Year 4 level, calculate the additional profit potential facing Gagnon. 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 $250 per unit. In Year 3, competition forced the bid to drop to $320. In your calculations, round units to whole numbers. Compute the total contribution margin in Year 3 assuming the same percentage of quality costs as in Year 1. Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
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 | $20,000,000 | 25% |
| 2 | 22,000,000 | 22 |
| 3 | 22,000,000 | 18 |
| 4 | 24,000,000 | 14 |
Transcribed Image Text: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 2.5 percent of sales. Assuming sales will continue at the Year 4 level, calculate the additional profit potential facing Gagnon.
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 $250 per unit. In Year 3, competition forced the
bid to drop to $320.
In your calculations, round units to whole numbers.
Compute the total contribution margin in Year 3 assuming the same percentage of quality costs as in Year 1.
Now, compute the total contribution margin in Year 3 using the actual quality costs for Year 3.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 6 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education