Question

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)	$555,000
Reworking products (due to failed component)	8,220,000
Warranty work (due to failed component)	12,070,000

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 $5,792,000 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

Bowman Company Requirement 1 Inspecting components: $555,000 / (80+3,920) $138.75 per sampling hour Reworking products: $8,220,000 $1,370 per rework hour (360+5,640) Warranty work $12,070,000/ (800+15,200) $754.38 per warranty hour - Manzer Inc purchase cost ($89 : Total supplier cost ($138.75 x80 ) + ($1,370 x360) +( $754.38 x800) 800,000) $72,307,800 + Unit cost $72,307,800 800,000 $90.38 Buckner Company Total supplier cost= ($138.75 x 3,920) + ($1,370 x5,640) + ($754.38 x 15,200) purchase cost ($86 x 3,200,000) $294,937,200 Unit cost $294,937,200 / 3,200,000 $92.17 X

Requirement 2a. Using warranty hours,the rate is $5,792,000/ 16000 $362 per warranty hour The cost assigned to each component would be: Manzer Inc Buckner Company Lost Sales: $362 x 800 289600 $362 x 15200 5502400 Total 289600 5502400 Requirement 2b Manzer Inc.: $289,600 800,000 = .36 (increase in unit cost) Bucker Company: $5,502,400 / 3,200,000 $1.72 (increase in unit cost)