Mercury, Inc., produces cell phones at its plant in Texas. In recent years, the
ID: 1217188 • Letter: M
Question
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 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! I’m nervous about having my annual bonus based on a decrease in quality costs; there are too many variables that we have no control over.”
Mercury’s quality improvement program has now been in operation for one year. The company’s most recent quality cost report is shown below.
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.”
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).
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.
Explanation / Answer
Quality Cost Report (in thousands) Cost as a %age of Production cost Cost as a %age of Quality cost Prevention costs: Last Year This Year Last Year This Year Last Year This Year Machine maintenance 220.00 130.00 5.3 2.9 23.3 22.8 Training suppliers 6.00 20.00 0.1 0.4 0.6 3.5 Quality circles 24.00 85.00 0.6 1.9 2.5 14.9 Total prevention costs 250.00 235.00 6.1 5.2 26.4 41.2 Appraisal costs: 0.0 0.0 0.0 0.0 Incoming inspection 35.00 24.00 0.8 0.5 3.7 4.2 Final testing 160.00 82.00 3.9 1.8 16.9 14.4 Total appraisal costs 195.00 106.00 4.7 2.3 20.6 18.6 Internal failure costs: 0.0 0.0 0.0 0.0 Rework 120.00 64.00 2.9 1.4 12.7 11.2 Scrap 64.00 55.00 1.6 1.2 6.8 9.6 Total internal failure costs 184.00 119.00 4.5 2.6 19.5 20.8 External failure costs: 0.0 0.0 0.0 0.0 Warranty repairs 63.00 25.00 1.5 0.6 6.7 4.4 Customer returns 254.00 86.00 6.2 1.9 26.8 15.1 Total external failure costs 317.00 111.00 7.7 2.5 33.5 19.4 Total quality cost 946.00 571.00 - - 100.0 100.0 Total production cost 4120.00 4520.00 100.0 100.0 - -