Mercury, Inc., produces cell phones at its plant in Texas. In recent years, the companys 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 companys cell phones had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercurys president, initiated a crash 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! Im nervous about having my annual bonus based on a decrease in quality costs; there are too many variables that we have no control over.

Mercurys quality improvement program has now been in operation for one year. The companys most recent quality cost report is shown below.

Mercury, Inc.
Quality Cost Report
(in thousands)
	Last Year		This Year
Prevention costs:
Machine maintenance	$	300	$	115
Training suppliers		8		20
Quality circles		22		75
Total prevention costs		330		210
Appraisal costs:
Incoming inspection		55		28
Final testing		170		94
Total appraisal costs		225		122
Internal failure costs:
Rework		140		68
Scrap		60		65
Total internal failure costs		200		133
External failure costs:
Warranty repairs		71		29
Customer returns		270		98
Total external failure costs		341		127
Total quality cost	$	1,096	$	592
Total production cost	$	4,200	$	4,600

As they were reviewing the report, Elsoe asked Tran what he now thought of the quality improvement program. Tran replied. Im relieved that the new quality improvement program hasnt 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 companys 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 $300 % % $115 % % Training suppliers 8 20 Quality circles 22 75 Total prevention costs 330 0.0 0.0 210 0.0 0.0 Appraisal costs: Incoming inspection 55 28 Final testing 170 94 Total appraisal costs 225 0.0 0.0 122 0.0 0.0 Internal failure costs: Rework 140 68 Scrap 60 65 Total internal failure costs 200 0.0 0.0 133 0.0 0.0 External failure costs: Warranty repairs 71 29 Customer returns 270 98 Total external failure costs 341 0.0 0.0 127 0.0 0.0 Total quality cost $1,096 0.0 0.0 $592 0.0 0.0 Total production cost $4,200 $4,600