Mercury, Inc. Quality Cost Report (in thousands) Last Year This Year Prevention costs: Machine maintenance $ 340 $ 140 Training suppliers 6 10 Quality circles 24 75 Total prevention cost 370 225 Appraisal costs: Incoming inspection 50 26 Final testing 165 82 Total appraisal cost 215 108 Internal failure costs: Rework 130 64 Scrap 68 50 Total internal failure cost 198 114 External failure costs: Warranty repairs 75 36 Customer returns 278 84 Total external failure cost 353 120 Total quality cost $ 1,136 $ 567 Total production cost $ 4,240 $ 4,640 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.
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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,
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 | $ | 340 | $ | 140 |
| Training suppliers | 6 | 10 | ||
| Quality circles | 24 | 75 | ||
| Total prevention cost | 370 | 225 | ||
| Appraisal costs: | ||||
| Incoming inspection | 50 | 26 | ||
| Final testing | 165 | 82 | ||
| Total appraisal cost | 215 | 108 | ||
| Internal failure costs: | ||||
| Rework | 130 | 64 | ||
| Scrap | 68 | 50 | ||
| Total internal failure cost | 198 | 114 | ||
| External failure costs: | ||||
| Warranty repairs | 75 | 36 | ||
| Customer returns | 278 | 84 | ||
| Total external failure cost | 353 | 120 | ||
| Total quality cost | $ | 1,136 | $ | 567 |
| Total production cost | $ | 4,240 | $ | 4,640 |
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).)
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