Mercury Inc produces cell phones at its plant in Texas In re

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.

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
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

Solution

Answer

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%

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%