Costs of quality. (CMA, adapted) Bergen Inc. produces telephone equipment at its London plant. In recent years, the company’s market share has been eroded by stiff competition from Asian and European competitors. Price and product quality are the two key areas in which companies compete in this market.

Jerry Holman, Bergen’s president, decided to devote more resources to the improvement of product quality after learning that his company’s products had been ranked fourth in product quality in a 2006 survey of telephone equipment users.

He believed that Bergen could no longer afford to ignore the importance of product quality.

Bergen’s quality improvement program has now been in operation for two years, and the cost report shown below has recently been issued.

As they were reviewing the report, Sheila Haynes, manager of sales, asked Tony Reese, production manager, what he thought of the quality program. “The work is really moving through the Production Department,” replied Reese. “We used to spend time help¬

ing the Customer Service Department solve their problems but they are leaving us alone these days.”

Semi-Annual Costs of Quality Report, Bergen Inc.
(in Thousands)
6/30/2007 12/31/2007 6/30/2008 12/31/2008 Machine maintenance $ 258 $ 258 $ 228 $ 192 Training suppliers Design reviews 6 24 54 122 24 120 LVa 18 114 Total prevention costs Appraisal costs 288 5,1?* 434 l.O% 372 324 f.Oji Incoming inspection 54 64 43 26 Final testing 192 192 168 113 Total appraisal costs ^ ,u Internal failure costs H 246 256 fy-TA 211 7.M, 139 Rework 144 127 106 74 Scrap 82 77 50 48 Total internal failure costs 226 204 ?'7* 156 122 '
External failure costs Warranty repairs 83 37 30 28 Customer returns 314 301 139 96 Total external failure costs 397 f.oA 338 b-9-% 169 124 Total quality costs $1,157 $1,232 7^6 h $ 908 /fy'TT S 709 Total production and sales $4,944 $5,448 $5,580 $5,412 762 Required 1. By analyzing the Cost of Quality Report presented, determine whether Bergen Inc.’s quality improvement program has been successful. List specific evidence to support your answer.
2. Jerry Holman believed that the quality improvement program was essential and that Bergen Inc. could no longer afford to ignore the importance ofproduct quality. Discuss how Bergen could measure the opportunity cost of not implementing the quality improvement program.