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A quality control activity analysis indicated the following four activity costs of an administrative department:
Redesigning a form to reduce errors $ 15,000
Responding to customer complaints 75,000
Verifying the accuracy of a form 30,000
Correcting errors in forms 60,000
Total $180,000
If sales are $3,000,000, what percentage of total sales are the prevention costs?

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Answer:

Given:

Cost of Redesigning a form to reduce errors = $15,000

Cost of Responding to customer complaints = $75,000

Cost of Verifying the accuracy of a form = $30,000

Cost of Correcting errors in forms = $60,000

Sales = $3,000,000

Prevention costs is defined as the costs that incur to obviate or decrease the number of flaw at first places.  is defined as the costs that incur to obviate or decrease the number of flaw at first places.

Here Prevention cost is computed as :

Prevention cost = Cost of Redesigning a form to reduce errors + Cost of Responding to customer complaints + Cost of Correcting errors in forms

Prevention cost = $15,000 + $75,000 + $60,000

Prevention cost = $ 150,000

∴ Prevention cost to total sales ratio = [tex]\frac{Prevention \: cost}{total \:sales\: ratio}[/tex]

Prevention cost to total sales ratio = [tex]\frac{150000}{3000000}[/tex]

Prevention cost to total sales ratio = 0.05

% Prevention cost to total sales = 5%

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