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) $ 480,000

Reworking products (due to failed component) 6,084,000

Warranty work (due to failed component) 9,600,000

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.

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 unit cost to two decimal places.)

 

2. Suppose that Bowman loses $4,000,000 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. By how much would this change the cost of

each supplier’s component? (Round to two decimal places.)