ADM 2320 Chapter Notes - Chapter 11: Monopolistic Competition, Pricing Strategies, Price Fixing
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Mercury, Inc., produces cell phones at its plant in Texas. Inrecent years, the companyâs 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 companyâs cellphones had been ranked low in product quality in a consumer survey.Shocked by this result, Jorge Gomez, Mercuryâs 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, âI 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! Iâm nervous about having my annual bonusbased on a decrease in quality costs; there are too many variablesthat we have no control over.â |
Mercuryâs quality improvementprogram has now been in operation for one year. The companyâs 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. âIâm relieved that the new qualityimprovement program hasnât 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.â |
Required: |
1. | Expand the companyâs 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). |
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