Question

Mercury, Inc., produces cell phones at its plant in Texas. In recent years, the company’s market share has been eroded by stiff competition from overseas. Price and product quality are the two key areas in which companies compete in this market.

A year ago, the company’s cell phones had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercury’s president, initiated an intense effort to improve product quality. Gomez set up a task force to implement a formal quality improvement program. Included on this task force were representatives from the Engineering, Marketing, Customer Service, Production, and Accounting departments. The broad representation was needed because Gomez believed that this was a companywide program and that all employees should share the responsibility for its success.

After the first meeting of the task force, Holly Elsoe, manager of the Marketing Department, asked John Tran, production manager, what he thought of the proposed program. Tran replied, “I have reservations. Quality is too abstract to be attaching costs to it and then to be holding you and me responsible for cost improvements. I like to work with goals that I can see and count! I’m nervous about having my annual bonus based on a decrease in quality costs; there are too many variables that we have no control over.”

Mercury’s quality improvement program has now been in operation for one year. The company’s most recent quality cost report is shown below.

Mercury, Inc.
Quality Cost Report
(in thousands)
	Last Year		This Year
Prevention costs:
Machine maintenance	$	370	$	130
Training suppliers		9		10
Quality circles		21		85
Total prevention cost		400		225
Appraisal costs:
Incoming inspection		65		20
Final testing		150		88
Total appraisal cost		215		108
Internal failure costs:
Rework		110		70
Scrap		74		45
Total internal failure cost		184		115
External failure costs:
Warranty repairs		78		28
Customer returns		252		87
Total external failure cost		330		115
Total quality cost	$	1,129	$	563
Total production cost	$	4,270	$	4,670

As they were reviewing the report, Elsoe asked Tran what he now thought of the quality improvement program. Tran replied. “I’m relieved that the new quality improvement program hasn’t hurt our bonuses, but the program has increased the workload in the Production Department. It is true that customer returns are way down, but the cell phones that were returned by customers to retail outlets were rarely sent back to us for rework.”

Required:

1. Expand the company’s quality cost report by showing the costs in both years as percentages of both total production cost and total quality cost. (Round your percentage answers to 1 decimal place (i.e 0.1234 should be entered as 12.3).)

Answer 1

Quality Cost Report
For the Year ended Last Year
Particulars	Costs	Total	% of Total Quality Costs	% of Total Production Costs Costs
Prevention Costs:
Machine Maintainance	$                                      370
Training Suppliers	$                                          9
Quality circles	$                                        21	$                                            400	35.4%	9.4%
Appraisal Costs:
Incoming Inspection	$                                        65
Final Testing	$                                      150	$                                            215	19.0%	5.0%
Internal Failure Cost:
Rework	$                                      110
Scrap	$                                        74	$                                            184	16.3%	4.3%
External Failure Cost:
Warranty Repairs	$                                        78
Customer returns	$                                      252	$                                            330	29.2%	7.7%
Total Quality Costs		$                                         1,129	100.0%
Total Production Costs		$                                         4,270		26.4%
Quality Cost Report
For the Year ended This Year
Particulars	Costs	Total	% of Total Quality Costs	% of Total Production Costs Costs
Prevention Costs:
Machine Maintainance	$                                      130
Training Suppliers	$                                        10
Quality circles	$                                        85	$                                            225	40.0%	4.8%
Appraisal Costs:
Incoming Inspection	$                                        20
Final Testing	$                                        88	$                                            108	19.2%	2.3%
Internal Failure Cost:
Rework	$                                        70
Scrap	$                                        45	$                                            115	20.4%	2.5%
External Failure Cost:
Warranty Repairs	$                                        28
Customer returns	$                                        87	$                                            115	20.4%	2.5%
Total Quality Costs		$                                            563	100.0%
Total Production Costs		$                                         4,670		12.1%