Problem 12-17 (Algo) Analyzing a Quality Cost Report [LO12-2]

Mercury, Inc., 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, Inc.
Quality Cost Report
(in thousands)
	Last Year		This Year
Prevention costs:
Machine maintenance	$	200	$	150
Training suppliers		4		10
Quality circles		26		90
Total prevention cost		230		250
Appraisal costs:
Incoming inspection		45		20
Final testing		150		90
Total appraisal cost		195		110
Internal failure costs:
Rework		100		60
Scrap		60		45
Total internal failure cost		160		105
External failure costs:
Warranty repairs		60		20
Customer returns		250		88
Total external failure cost		310		108
Total quality cost	$	895	$	573
Total production cost	$	4,100	$	4,500

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.

Required:

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. (Round your percentage answers to 1 decimal place (i.e 0.1234 should be entered as 12.3).)

Required: 1. Expand the company's quality cost report by showing the costs in both years as percentages of both total production cost and total quality cost. (Round your percentage answers to 1 decimal place (i.e 0.1234 should be entered as 12.3).) Mercury, Inc. Quality Cost Report (in thousands) Last Year Percentage of Total Production Percentage of Cost Total Quality Cost This Year Percentage of Total Production Cost Amount Amount Percentage of Total Quality Cost $ 200 % % $ 150 % % 4 10 26 90 230 0.0 0.0 250 0.0 0.0 Prevention costs: Machine maintenance Training suppliers Quality circles Total prevention costs Appraisal costs: Incoming inspection Final testing Total appraisal costs Internal failure costs: 45 20 150 90 195 0.0 0.0 110 0.0 0.0 Rework 100 60 Scrap 60 45 160 0.0 0.0 105 0.0 0.0 Total internal failure costs External failure costs: Warranty repairs 60 20 250 88 Customer returns Total external failure costs 310 0.0 0.0 108 0.0 0.0 0.0 $ 895 0.0 0.0 $ 573 0.0 Total quality cost Total production cost $ 4,100 $ 4,500