Question

please read question carefully and solve the 2 questions

KANSAS CORPORATION ....manufactures medical equipment. They produce all the components necessary for the production of one of its products except for one. This component is purchased from two local suppliers: Supplier A and Supplier Supplier A sells the component for $192 per unit, while Supplier B sells the same component for $172. Because of the lower price, the company purchases 80 percent of its components from Supplier B. They purchase the remaining 20 percent from Supplier A to ensure an alternative source. The total annual demand is 1,500,000 components. Supplier A's sales manager is pushing the company to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Supplier B's lower-quality component. Supplier A has sufficient capacity to supply all the components needed and is asking for a long-term contract. With a five-year contract for 1,200,000 or more units, Supplier A will sell the component for $180 per unit with a contractual provision for an annual product- specific inflationary adjustment. s n gish (United States

Answer 1

Computation of cost Driver rates Overhead related to Inspecting comonents $1,800,000 Cost Driver - No of Sampling hours Sampling hours for supplier A 30 Sampling hours for supplier B 1470 Total Sampling hours 1500 Cost per Sampling hour $1,800,000/1500 1200 1.440,000 Expediting orders Overhead related to expediting work due to late delivery= Cost Driver - No of expediting order for supplier A No of expediting order for supplier B Total expediting orders Expediting work cost per order = 15 135 150 1,440,000/150 9600 Overhead related to Reworking Cost Driver - Rework hours for Supplier A Rework hours for Supplier B Total Rework hours= Rework cost per hour = 10,266,750 Rework hours 135 2,115 2,250 10,266,750/2250 4,563 Overhead related to Warranty work Cost Driver - Warranty hours for Supplier A Warranty hours for Supplier B Total Warranty hours Warranty work cost per hour = 32,400,000 Warranty hours 300 5,700 6,000 32,400,000/6000 5400

Supplier A 300,000 Supplier B 1,200,000 Answer 1 Calculation of cost per component Particulars No of units Purchase price per unit Inspection cost Expediting work cost Rework cost Warranty work cost Total per unit cost (1200*30)/300,000 (9600*15)/300,000 (4563*135)/300,000 (5400*300)/300000 per unit cost 192 0.12 0.48 2.05 5.4 200.05 (1200*1470)/1,200,000 (9600*135)/1,200,000 (4563*2115)/1,200,000 (5400*5700)/1,200,000 per unit cost 172 1.47 1.08 8.04 25.65 208.24

Answer (2) (a) For assigning cost to each supplier it is necessary to know that whether product failed due to these components or other (b) warranty hours cost Driver should be applied to assign these costs. (c) Quality related cost Cost Driver Warranty hours for Supplier A Warranty hours for Supplier B Total Warranty hours Warranty work cost per hour $6,750,000 Warranty hours 300 5700 6000 6,750,000/6000 1125 Supplier A 300,000 (d) Calculation of cost per component Particulars No of units Purchase price per unit Inspection cost Expediting work cost Rework cost Warranty work cost Quality related cost Total per unit cost (1200*307300.000 (9600 157300,000 (4563*135/300,000 (5400*3007300000 (1125*3007300,000 1 Supplier B 1,200,000 1 (1200 1470V1.200.000 (9600°13571,200,000 (456321151,200,000 (5400*570071,200,000 (1125*570091,200,000 per unit cost 192 0.12 0.48 2.05 5.4 1.13 201.18 per unit cost 72 1.47 .08 8.04 25.65 5.34 213.59