Question

Fame Company manufactures engines. Fame produces all the parts necessary for its engines, except for one electronic component, which is purchased from two local suppliers: Hydra International and Parable Company. Both suppliers are reliable and rarely deliver late. Hydra sells the component for $12.00 per unit, while Parable sells the same component for $10.00. Fame purchases 80% of its components from Parable because of the lower price it offers. The total annual demand is 95,000 units. I. Activity Data Inspecting components (sampling only) Reworking products (due to failed component) Warranty work (due to failed component) Activity Cost $ 210,000 $2,454,000 $1,923,000 II. Supplier Data Unit purchase price Units purchased Sampling hours Rework hours Warranty hours Hydra International $12.00 19,000 60 Parable Company $10.00 76,000 2,600 3,800 7,000 550 Suppose that Fame loses $3,500,000 in sales per year because of its reputation for defective units attributable to failed components. Using warranty hours, assign the proportional cost of lost sales to Hydra International. What is the increase in the cost per component? (Note: Round the lost sales per warranty hour and the cost of the component to two decimal places.) a. $4.65 per unit Ob. $8.95 per unit c. $25.72 per unit d. $13.42 per unit

please help. this is the last question I need answered on my quiz and I can't figure it out

Answer 1

Solution:

The option , d. $13.42 per unit is correct option'.

Explanation:

First we calculate, loss per warranty hour:

Hydra International warranty hours	550 hrs.
Parable Company warranty hours	7,000 hrs.
Total hrs.	7,550 hrs.
Loss sales per warranty hour	$463.576 or $463.58 per hour ($3,500,000/7,550 hrs.)

	Hydra International	Parable Company
Lost sales	$254,969($463.58 × 550 hrs.)	$3,245,060($463.58 ×7,000 hrs.)
Components sold	19,000	76,000
Cost per unit	$13.419 or $13.42(254,969/19,000)	$42.698 or $42.70($3,245,060/7000 hrs. )

So, the increase in the cost per component is for Hydra International $13.42.

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