How do I calculate the quality cost report? I have looked in my book and found nothing. Here is the problem:

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.

Mercury, Inc.Quality Cost Report(in thousands)

Last Year This Year

Prevention costs:

Machine maintenance $350 $150

Training suppliers 7 15

Quality circles 23 70

Total prevention cost 380 235

Appraisal costs:

Incoming inspection 55 28

Final testing 170 84

Total appraisal cost 225 112

Internal failure costs:

Rework 140 66

Scrap 70 60

Total internal failure cost 210 126

External failure costs:

Warranty repairs 76 25

Customer returns 280 85

Total external failure cost 356 110

Total quality cost $1,171 $583

Total production cost $4,250 $4,650

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.