Mercury, Inc., produces pagers 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 pagers had been ranked low in product quality in a consumer survey. Shocked by this result, Jorge Gomez, Mercury’s president, initiated a crash effort to improve product quality. Gomez set up 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 department. 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 your and me responsible for cost improvement. 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)

	This year	Last Year
Prevention costs: Machine maintenance……………..	$ 120	$ 70
Training suppliers…………………	10	0
Quality circles…………………….	20	0
Total prevention costs……………	150	70
Appraisal costs: Incoming inspection………………	40	20
Final testing……………………….	90	80
Total appraisal costs………………	130	100
Internal failure costs: Rework…………………………..	130	50
Scrap…………………………….	70	40
Total Internal failure costs………	200	90
External failure costs.	30	90
Customer returns………………..	80	320
Total external failure costs………	110	410
Total quality cost…………………	$590	$670
Total production cost……………	$4,800	$4,200

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 pagers that were returned by customer to detail outlets were rarely sent back to us for rework.

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. Carry all computations to one decimal place. BY analyze and the report, determine if Mercury, Inc.’s quality improvement program has been successful. List specific evidence to support your answer

2. Do you expect the improvement program as it progresses to continue to increase the work load in the Production Department?

3. Jorge Gomez believed that the quality improvement program was essential and that Mercury, Inc., could no longer afford to ignore the importance of product quality. Discuss how Mercury, Inc., could measure the cost of not implementing the quality improvement program.

(CMA, adapted)