Question

Activity-Based Supplier Costing

Bowman Company manufactures cooling systems. Bowman produces all the parts necessary for its product except for one electronic component, which is purchased from two local suppliers: Manzer Inc. and Buckner Company. Both suppliers are reliable and seldom deliver late; however, Manzer sells the component for $89 per unit, while Buckner sells the same component for $86. Bowman purchases 80% of its components from Buckner because of its lower price. The total annual demand is 4,000,000 components.

To help assess the cost effect of the two components, the following data were collected for supplier-related activities and suppliers:

I. Activity Data

	Activity Cost
Inspecting components (sampling only)	$545,000
Reworking products (due to failed component)	7,620,000
Warranty work (due to failed component)	9,370,000

II. Supplier Data

	Manzer Inc.	Buckner Company
Unit purchase price	$89	$86
Units purchased	800,000	3,200,000
Sampling hours*	80	3,920
Rework hours	360	5,640
Warranty hours	800	15,200

* Sampling inspection for Manzer’s product has been reduced because the reject rate is so low.

Required:

1. Calculate the cost per component for each supplier, taking into consideration the costs of the supplier-related activities and using the current prices and sales volume. (Note: Round the intermediate calculations to the whole number for the following activity rates: "Reworking products" and "Warranty work". Round the unit cost to two decimal places.)

Manzer Inc.	$per unit
Buckner Company	$per unit

2a. Suppose that Bowman loses $5,264,000 in sales per year because it develops a poor reputation due to defective units attributable to failed components. Using warranty hours, assign the cost of lost sales to each supplier.

Manzer	$
Buckner	$

2b. By how much would this change the cost of each supplier's component? Round your answers to the nearest cent.

Manzer	unit cost increase	$
Buckner	unit cost increase	$

Answer 1

Solution:-

1.

Activity rates

Inspecting components=$545,000/(80+3920)

=$136.25 per sampling hour

Reworking products=$7,620,000/(360+5640)

=$1270 per rework hour

Warranty work=$9,370,000/(800+15200)

=$1561.66 per warranty hour

Cost per component by supplier:

	Manzer	Buckner
Purchase cost	$71,200,000 (89×800000)	$275,200,000 (86×3200000)
Inspecting components	$10,900 (136.25×80)	$534,100 (136.25×3920)
Reworking products	$457,200 (360×1270)	$7,162,800 (5640×1270)
Warranty work	$1,249,336 (1561.67×800)	$23,737,384 (1561.67×15200)
Total supplier cost	$72,917,526	$306,634,284
Units supplied	÷ 800,000	÷3,200,000
Unit cost	$91.146	$95.823

2a.using warranty hours, the rate is=5,264000/16000

=$329

2b. Cost assigned to each component would be:

	Manzer	Buckner
Lost sales	$263,200 (329×800)	$5,000,800 (329×15200)
Units supplied	800,000	3,200,000
Increase in unit cisy	$0.329	$1.562