1. An analysis of the company’s quality cost report is presented below:
This Year Last Year
Amount Percent* Amount Percent*
Prevention costs:
Machine maintenance ... $ 120 2.5 20.3 $70 1.7 10.4
Training suppliers ... 10 0.2 1.7 0 0.0 0.0
Quality circles... 20 0.4 3.4 0 0.0 0.0
Total prevention costs ... 150 3.1 25.4 70 1.7 10.4
Appraisal costs:
Incoming inspection... 40 0.8 6.8 20 0.5 3.0
Final testing ... 90 1.9 15.3 80 1.9 11.9
Total appraisal costs... 130 2.7 22.0 100 2.4 14.9
Internal failure costs:
Rework ... 130 2.7 22.0 50 1.2 7.5
Scrap... 70 1.5 11.9 40 1.0 6.0
Total internal failure
costs... 200 4.2 33.9 90 2.1 13.4
External failure costs:
Warranty repairs... 30 0.6 5.1 90 2.1 13.4
Customer returns... 80 1.7 13.6 320 7.6 47.8
Total external failure
costs... 110 2.3 18.6 410 9.8 61.2
Total quality cost... $ 590 12.3 100.0 $670 16.0 100.0
Total production cost... $4,800 $4,200
* Percentage figures may not add down due to rounding.
Problem 2-22 (continued)
From the above analysis it would appear that Mercury, Inc.’s program has
been successful.
o Total quality costs have declined from 16.0% to 12.3% as a percent-
age of total production cost. In dollar amount, total quality costs
went from $670,000 last year to $590,000 this year.
o External failure costs, those costs signaling customer dissatisfaction,
have declined from 9.8% of total production costs to 2.3%. These
declines in warranty repairs and customer returns should result in in-
creased sales in the future.
o Appraisal costs have increased from 2.4% to 2.7% of total production
cost.
o Internal failure costs have increased from 2.1% to 4.2% of produc-
tion costs. This increase has probably resulted from the increase in
appraisal activities. Defective units are now being spotted more fre-
quently before they are shipped to customers.
o Prevention costs have increased from 1.7% of total production cost
to 3.1% and from 10.4% of total quality costs to 25.4%. The
$80,000 increase is more than offset by decreases in other quality
costs.
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