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 $ 240 $ 115 22 270 50 170 22e Prevention costs: Machine maintenance Training suppliers Quality circles Total prevention cost Appraisal costs: Incoming inspection Final testing Total appraisal cost Internal failure costs: Rework Scrap Total internal failure cost External failure costs: Warranty repairs Customer returns Total external failure cost Total quality cost Total production cost 140 208 258 323 $1,021 5 570 4.540 $ 4,140 $

Answer 1

Ans.

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	240	5.8	%	23.5	%	115	2.5	%	20.2	%
Training suppliers	8	0.2		0.8		15	0.3		2.6
Quality circles	22	0.5		2.2		75	1.7		13.2
Total prevention costs	270	6.5		26.4		205	4.5		36.0
Appraisal costs:
Incoming inspection	50	1.2		4.9		28	0.6		4.9
Final testing	170	4.1		16.7		86	1.9		15.1
Total appraisal costs	220	5.3		21.5		114	2.5		20.0
Internal failure costs:
Rework	140	3.4		13.7		68	1.5		11.9
Scrap	68	1.6		6.7		65	1.4		11.4
Total internal failure costs	208	5.0		20.4		133	2.9		23.3
External failure costs:
Warranty repairs	65	1.6		6.4		30	0.7		5.3
Customer returns	258	6.2		25.3		88	1.9		15.4
Total external failure costs	323	7.8		31.6		118	2.6		20.7
Total quality cost	1021			100.0		570			100.0
Total production cost	4140	100.0				4540	100.0