Mercury, Inc., produces cell phones at its plant in Texas. In recent years, the
ID: 2605949 • 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 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, 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.”
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).)
Mercury, Inc. Quality Cost Report (in thousands) Last Year This Year Prevention costs: Machine maintenance $ 250 $ 120 Training suppliers 9 20 Quality circles 21 80 Total prevention cost 280 220 Appraisal costs: Incoming inspection 55 30 Final testing 175 88 Total appraisal cost 230 118 Internal failure costs: Rework 150 70 Scrap 70 40 Total internal failure cost 220 110 External failure costs: Warranty repairs 66 33 Customer returns 260 89 Total external failure cost 326 122 Total quality cost $ 1,056 $ 570 Total production cost $ 4,150 $ 4,550Explanation / Answer
Answer
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
250
6.0%
23.7%
120
2.6%
21.1%
Training suppliers
9
0.2%
0.9%
20
0.4%
3.5%
Quality circles
21
0.5%
2.0%
80
1.8%
14.0%
Total prevention costs
280
6.7%
26.5%
220
4.8%
38.6%
Appraisal costs:
Incoming inspection
55
1.3%
5.2%
30
0.7%
5.3%
Final testing
175
4.2%
16.6%
88
1.9%
15.4%
Total appraisal costs
230
5.5%
21.8%
118
2.6%
20.7%
Internal failure costs:
Rework
150
3.6%
14.2%
70
1.5%
12.3%
Scrap
70
1.7%
6.6%
40
0.9%
7.0%
Total internal failure costs
220
5.3%
20.8%
110
2.4%
19.3%
External failure costs:
Warranty repairs
66
1.6%
6.3%
33
0.7%
5.8%
Customer returns
260
6.3%
24.6%
89
2.0%
15.6%
Total external failure costs
326
7.9%
30.9%
122
2.7%
21.4%
Total quality cost
1056
25.4%
100.0%
570
12.5%
100.0%
Total production cost
4150
100.0%
4550
100.0%
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
250
6.0%
23.7%
120
2.6%
21.1%
Training suppliers
9
0.2%
0.9%
20
0.4%
3.5%
Quality circles
21
0.5%
2.0%
80
1.8%
14.0%
Total prevention costs
280
6.7%
26.5%
220
4.8%
38.6%
Appraisal costs:
Incoming inspection
55
1.3%
5.2%
30
0.7%
5.3%
Final testing
175
4.2%
16.6%
88
1.9%
15.4%
Total appraisal costs
230
5.5%
21.8%
118
2.6%
20.7%
Internal failure costs:
Rework
150
3.6%
14.2%
70
1.5%
12.3%
Scrap
70
1.7%
6.6%
40
0.9%
7.0%
Total internal failure costs
220
5.3%
20.8%
110
2.4%
19.3%
External failure costs:
Warranty repairs
66
1.6%
6.3%
33
0.7%
5.8%
Customer returns
260
6.3%
24.6%
89
2.0%
15.6%
Total external failure costs
326
7.9%
30.9%
122
2.7%
21.4%
Total quality cost
1056
25.4%
100.0%
570
12.5%
100.0%
Total production cost
4150
100.0%
4550
100.0%