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	$	250	$	120
Training suppliers		9		20
Quality circles		21		80
Total prevention cost		280		220
Appraisal costs:
Incoming inspection		55		30
Final testing		175		88
Total appraisal cost		230		118
Internal failure costs:
Rework		150		70
Scrap		70		40
Total internal failure cost		220		110
External failure costs:
Warranty repairs		66		33
Customer returns		260		89
Total external failure cost		326		122
Total quality cost	$	1,056	$	570
Total production cost	$	4,150	$	4,550

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).)

Mercury, Inc.
Quality Cost Report
(in thousands)
	Last Year					This Year
	Amount	Percentage of Total Production Cost		Percentage of Total Quality Cost		Amount	Percentage of Total Production Cost		Percentage of Total Quality Cost
Prevention costs:
Machine maintenance	$250		%		%	$120		%		%
Training suppliers	9					20
Quality circles	21					80
Total prevention costs	280	0.0		0.0		220	0.0		0.0
Appraisal costs:
Incoming inspection	55					30
Final testing	175					88
Total appraisal costs	230	0.0		0.0		118	0.0		0.0
Internal failure costs:
Rework	150					70
Scrap	70					40
Total internal failure costs	220	0.0		0.0		110	0.0		0.0
External failure costs:
Warranty repairs	66					33
Customer returns	260					89
Total external failure costs	326	0.0		0.0		122	0.0		0.0
Total quality cost	$1,056	0.0		0.0		$570	0.0		0.0
Total production cost	$4,150					$4,550

Answer 1

• % of total production cost is calculated by dividing respective figures by Total production cost
• % of total quality cost is calculated by dividing respective figures by Total Quality cost concerned.
• Requirement of question answered

Quality Cost Report
(in thousands)
	Last Year			This Year
	Amount	Percentage of Total Production Cost	Percentage of Total Quality Cost	Amount	Percentage of Total Production Cost	Percentage of Total Quality Cost
Prevention costs:
Machine maintenance	250	6.0%	23.7%	120	2.6%	21.1%
Training suppliers	9	0.2%	0.9%	20	0.4%	3.5%
Quality circles	21	0.5%	2.0%	80	1.8%	14.0%
Total prevention costs	280	6.7%	26.5%	220	4.8%	38.6%
Appraisal costs:
Incoming inspection	55	1.3%	5.2%	30	0.7%	5.3%
Final testing	175	4.2%	16.6%	88	1.9%	15.4%
Total appraisal costs	230	5.5%	21.8%	118	2.6%	20.7%
Internal failure costs:
Rework	150	3.6%	14.2%	70	1.5%	12.3%
Scrap	70	1.7%	6.6%	40	0.9%	7.0%
Total internal failure costs	220	5.3%	20.8%	110	2.4%	19.3%
External failure costs:
Warranty repairs	66	1.6%	6.3%	33	0.7%	5.8%
Customer returns	260	6.3%	24.6%	89	2.0%	15.6%
Total external failure costs	326	7.9%	30.9%	122	2.7%	21.4%
Total quality cost	1056	25.4%	100.0%	570	12.5%	100.0%
Total production cost	4150	100.0%		4550	100.0%