Mercury, Inc., produces cell phones at its plant in Texas. Inrecent years, the company’s market share has been eroded by stiffcompetition from overseas. Price and product quality are the twokey areas in which companies compete in this market.
A year ago, the company’s cell phones had been ranked low inproduct quality in a consumer survey. Shocked by this result, JorgeGomez, Mercury’s president, initiated an intense effort to improveproduct quality. Gomez set up a task force to implement a formalquality improvement program. Included on this task force wererepresentatives from the Engineering, Marketing, Customer Service,Production, and Accounting departments. The broad representationwas needed because Gomez believed that this was a companywideprogram and that all employees should share the responsibility forits success.
After the first meeting of the task force, Holly Elsoe, managerof the Marketing Department, asked John Tran, production manager,what he thought of the proposed program. Tran replied, “I havereservations. Quality is too abstract to be attaching costs to itand then to be holding you and me responsible for costimprovements. I like to work with goals that I can see and count!I’m nervous about having my annual bonus based on a decrease inquality costs; there are too many variables that we have no controlover.”
Mercury’s quality improvement program has now been in operationfor one year. The company’s most recent quality cost report isshown 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 nowthought of the quality improvement program. Tran replied. “I’mrelieved that the new quality improvement program hasn’t hurt ourbonuses, but the program has increased the workload in theProduction Department. It is true that customer returns are waydown, but the cell phones that were returned by customers to retailoutlets were rarely sent back to us for rework.”
Required:
1. Expand the company’s quality cost report by showing the costsin both years as percentages of both total production cost andtotal quality cost. (Round your percentage answers to 1decimal place (i.e 0.1234 should be entered as 12.3).)
