Mercury, Incorporated, produces cell phones at its plant in Texas. In recent years, the company s market
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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 $ $
Training suppliers
Quality circles
Total prevention cost
Appraisal costs:
Incoming inspection
Final testing
Total appraisal cost
Internal failure costs:
Rework
Scrap
Total internal failure cost
External failure costs:
Warranty repairs
Customer returns
Total external failure cost
Total quality cost $ $
Total production cost $ $
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 has'nt 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:
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 decimal place ie should be
entered as
Related Book For
Managerial Accounting
ISBN: 978-0697789938
13th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
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