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) Prevention costs: Machine maintenance Training suppliers Quality circles Total prevention cost Appraisal costs: Incoming inspection Final testing Last Year This Year $ 310 $ 120 9 10 21 70 340 200 60 30 150 96 210 126 Total appraisal cost Internal failure costs: Rework 150 70 Scrap 62 40 Total internal failure cost 212 110 External failure costs: Warranty repairs 72 30 Customer returns 272 80 Total external failure cost 344 110 Total quality cost $ 1,106 $ 546 Total production cost $ 4,210 $ 4,610 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."