Ryan Manufacturing's sales amounted to $590,000 for 2002. This amount is 15% higher than the prior year. Cost of sales amounted to 60% of sales in 2002 and 64% of sales in 2001. Ryan has identified the following quality costs for the two periods:
Item 2001 2002
Material and inspection $ 6,400 $ 6,600
Scrap 8,100 8,250
Employee training 16,800 14,700
Returned goods 8,700 7,300
System design changes 16,400 16,200
Product defects discovered 9,800 8,200
Processing customer complaints7,400 6,900
Testing equipment repair 5,400 2,600

Required:
a) Classify the above costs into prevention, appraisal, internal failure, and external failure costs.
b) Determine costs of quality as a percentage of total.
c) Determine the classified costs as a percentage of sales.
d) Determine the classified costs as a percentage of cost of sales.
e) Determine the percentage reduction or increase in costs from 2001 to 2002.
f) Analyze improvements between the two years with regards to costs of quality.

Saba Electronics has two service departments computer services (S1) and personnel (S2) as well as two production departments (P1 and P2). S1 costs amount to $285,000 and S2 costs amount to $98,500. Direct overhead of production departments amount to $495,000 and $386,500 respectively. S1 department is equipped to provide a total of 600 CPU hours of service. Currently, however, S2 uses 100 hours, P1 150 hours and P2 200 hours of this service. S2's costs are allocated to production units based on number of employees. P1 has 120 and P2 has 280 employees. P2 has indicated that due to the exorbitant costs of S1, it will contract out 100 hours of its work to an outside contractor which charges $350 for one hour of CPU time.

Required:
1) Using step-down allocation, allocate costs assuming that all resources provided are charged to the end units.
2) Using step-down allocation, allocate costs assuming that only resources used are charged to the end units.
3) Using step-down allocation, allocate costs assuming that P2 contracts out 100 hours of its work as indicated in the problem. Charging is based on resources used by departments.
4) Discuss the alternatives and various implications of cost management for the computer services department.

XYZ Company has three products X, Y, and Z. X sells for $20 with a variable cost of $8, Y sells for $30 with a variable cost of $21, Z sells for $50 with a variable cost of $40. Fixed costs amount to $214,000. Furthermore, assume that for every 5 units of X that are sold, the company sells 3 units of Y and 2 units of Z.

1) Determine break-even in units and dollars of each product.
2) Assuming a desired profit of $107,000, how much of each product should be sold?
3) Assuming a desired net profit of $149,800 and a tax rate of 30%, how much of each product should be sold?

Shahnaz Store has three departments; clothes (A) , toys (B) , accessories (C). Sales for the year amounted to $310,000, $230,000, and $140,000 for the three departments respectively. Cost of sales amounts to 50%, 40%, and 30% for the three lines of products. The departments' other direct costs including employees salaries and benefits amount to $65,000, $60,000, and $55,000 for each department respectively. The store's general administrative expenses including rent, utilities, accounting, and general manager's salary amounts to $150,000. This amount is divided equally among the three departments because each department occupies the same space and requires the same level of attention and time by general management.

Required: 1) Prepare a segmental income statement for the company. 2) Prepare a revised income statement considering closing of the Accessories department and renting it out for $30,000 a period. This decision will reduce general administrative expenses by 20%.

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