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Mercury, Inc., produces cell phones at its plant in Texas. In recent years, the company’s market share has beern 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. Mercury, Inc Quality Cost Report (in thousands) LastThis Year Year
Expert Answer
| Company’s Quality Cost Report | ||||||
| Mercury Inc. | ||||||
| Quality Cost Report | ||||||
| (in thousands) | ||||||
| Last Year | This Year | |||||
| Amount | Percentage of Total Production Costs | Percentage of Total Quality Costs | Amount | Percentage of Total Production Costs | Percentage of Total Quality Costs | |
| Prevention Costs : | ||||||
| Machine Maintenance | $270 | 6.5% | 25.9% | $140 | 3.1% | 23.6% |
| Training Suppliers | $5 | 0.1% | 0.5% | $12 | 0.3% | 2.0% |
| Quality Circles | $25 | 0.6% | 2.4% | $90 | 2.0% | 15.2% |
| Total Prevention Costs | $300 | 7.2% | 28.8% | $242 | 5.3% | 40.9% |
| Appraisal Costs: | ||||||
| Incoming Inspection | $40 | 1.0% | 3.8% | $20 | 0.4% | 3.4% |
| Final Testing | $185 | 4.4% | 17.8% | $90 | 2.0% | 15.2% |
| Total Appraisal Costs | $225 | 5.4% | 21.6% | $110 | 2.4% | 18.6% |
| Internal Failure Costs: | ||||||
| Rework | $110 | 2.6% | 10.6% | $62 | 1.4% | 10.5% |
| Scrap | $74 | 1.8% | 7.1% | $50 | 1.1% | 8.4% |
| Total Internal Failure Costs | $184 | 4.4% | 17.7% | $112 | 2.5% | 18.9% |
| External Failure Costs: | ||||||
| Warranty Repairs | $68 | 1.6% | 6.5% | $36 | 0.8% | 6.1% |
| Customer Returns | $264 | 6.3% | 25.4% | $92 | 2.0% | 15.5% |
| Total External Failure Costs | $332 | 8.0% | 31.9% | $128 | 2.8% | 21.6% |
| Total Quality Costs | $1,041 | $592 | ||||
| Total Production Costs | $4,170 | $4,570 | ||||
