Coral Corporation Reported the Following Sales and Quality Costs for the Past

Essay

Coral Corporation 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. $\begin{array}{rrr}&&\text { Quality Costs as }\\\text { Year } & \text { Sales Revenues } & \text { Percent of Revenues }\\1 & \$ 4,000,000 & 22.0 \% \\2 & 4,200,000 & 20.0 \% \\3 & 4,400,000 & 18.0 \% \\4 & 4,800,000 & 15.0 \%\end{array}$
Required:
a.Compute the quality costs for all four years.
b.By what amount did net income increase from Year 1 to Year 2, from Year 2 to Year 3, and from Year 3 to Year 4 as a result of quality improvements?
c.The management of Ambrosia Corporation 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.