Question

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 cellphones had been ranked low in product quality in a consumer survey.Shocked by this result, Jorge Gomez, Mercury’s president, initiateda crash effort to improve product quality. Gomez set up a taskforce to implement a formal quality improvement program. Includedon this task force were representatives from the Engineering,Marketing, Customer Service, Production, and Accountingdepartments. The broad representation was needed because Gomezbelieved that this was a companywide program and that all employeesshould share the responsibility for its success.

After the first meeting ofthe task force, Holly Elsoe, manager of the Marketing Department,asked John Tran, production manager, what he thought of theproposed program. Tran replied, “I have reservations. Quality istoo abstract to be attaching costs to it and then to be holding youand me responsible for cost improvements. I like to work with goalsthat I can see and count! I’m nervous about having my annual bonusbased on a decrease in quality costs; there are too many variablesthat we have no control over.”

Mercury’s quality improvementprogram has now been in operation for one year. The company’s mostrecent quality cost report is shown below.

Mercury, Inc.
Quality Cost Report
(in thousands)
	Last Year		This Year
Preventioncosts:
Machine maintenance	$	210	$	140
Training suppliers		5		15
Quality circles		25		80
Total preventioncosts		240		235
Appraisalcosts:
Incoming inspection		30		22
Final testing		155		92
Total appraisalcosts		185		114
Internal failurecosts:
Rework		110		62
Scrap		62		50
Total internalfailure costs		172		112
External failurecosts:
Warranty repairs		62		23
Customer returns		252		85
Total externalfailure costs		314		108
Total qualitycost	$	911	$	569
Total productioncost	$	4,110	$	4,510

As they were reviewing the report,Elsoe asked Tran what he now thought of the quality improvementprogram. Tran replied. “I’m relieved that the new qualityimprovement program hasn’t hurt our bonuses, but the program hasincreased the workload in the Production Department. It is truethat customer returns are way down, but the cell phones that werereturned by customers to retail outlets were rarely sent back to usfor rework.”

Required:

1.	Expand the company’s quality cost report by showing the costs inboth years as percentages of both total production cost and totalquality cost. Round your percentage answers to 1 decimalplace (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:
Machinemaintenance	$210		%		%	$140		%		%
Trainingsuppliers	5					15
Qualitycircles	25					80
Totalprevention costs	240	0.0		0.0		235	0.0		0.0
Appraisalcosts:
Incominginspection	30					22
Finaltesting	155					92
Totalappraisal costs	185	0.0		0.0		114	0.0		0.0
Internalfailure costs:
Rework	110					62
Scrap	62					50
Totalinternal failure costs	172	0.0		0.0		112	0.0		0.0
Externalfailure costs:
Warrantyrepairs	62					23
Customerreturns	252					85
Totalexternal failure costs	314	0.0		0.0		108	0.0		0.0
Totalquality cost	$911	0.0		0.0		$569	0.0		0.0
Totalproduction cost	$4,110					$4,510