Mercury, Incorporated, produces cell phones at its plant in Texas. In recent years, the companys 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 companys cell phones had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercurys 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! Im nervous about having my annual bonus based on a decrease in quality costs; there are too many variables that we have no control over.

Mercurys quality improvement program has now been in operation for one year. The companys most recent quality cost report is shown below.

Mercury, Incorporated
Quality Cost Report
(in thousands)
	Last Year	This Year
Prevention costs:
Machine maintenance	$ 340	$ 140
Training suppliers	6	10
Quality circles	24	75
Total prevention cost	370	225
Appraisal costs:
Incoming inspection	50	26
Final testing	165	82
Total appraisal cost	215	108
Internal failure costs:
Rework	130	64
Scrap	68	50
Total internal failure cost	198	114
External failure costs:
Warranty repairs	75	36
Customer returns	278	84
Total external failure cost	353	120
Total quality cost	$ 1,136	$ 567
Total production cost	$ 4,240	$ 4,640

As they were reviewing the report, Elsoe asked Tran what he now thought of the quality improvement program. Tran replied. Im relieved that the new quality improvement program hasnt 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.

1. Expand the companys quality cost report by showing the costs in both years as percentages of both total production cost and total quality cost.