Question

The procurement process for Omni Wholesale Company includes a series of activities that transforms a materials requisition into a vendor check. The process begins with a request for materials. The requesting department prepares and sends a materials request form to the Purchasing Department. The Purchasing Department then places a request for a quote to vendors. Vendors prepare bids in response to the request for a quote. A vendor is selected based on the lowest bid. A purchase order to the low-bid vendor is prepared. The vendor delivers the materials to the company, whereupon a receiving ticket is prepared. Payment to the vendor is authorized if the materials request form, receiving ticket, and vendor invoice are in agreement. These three documents fail to agree 40% of the time, initiating effort to reconcile the differences. Once the three documents agree, a check is issued. The process can be diagrammed as follows:

Requesting, Receiving, and Selecting Vendor Bids Preparing and Delivering Vendor Check Matching M/R, R/T, and Vendor Invoice Preparing Materials Request (M/R) Preparing Purchase Order Preparing Receiving Ticket (R/T)

An activity analysis indicated the following activity costs with this process:

1	Preparing materials request	$34,560.00
2	Requesting, receiving, and selecting vendor bids	112,320.00
3	Preparing purchase order	25,920.00
4	Preparing receiving ticket	30,240.00
5	Matching M/R, R/T, and invoice	60,480.00
6	Correcting reconciliation differences	133,920.00
7	Preparing and delivering vendor payment	34,560.00
8	Total process activity cost	$432,000.00

On average, the process handles 18,000 individual requests for materials that result in 18,000 individual payments to vendors.

Management proposes to improve this process in two ways. First, the Purchasing Department will develop a preapproved vendor list for which orders can be placed without a request for quote. It is expected that this will reduce the cost of requesting and receiving vendor bids by 75%. Second, additional training and standardization will be provided to reduce errors introduced into the materials requisition form and receiving tickets. It is expected that this will reduce the number of reconciliation differences from 50% to 10%, over an average of 18,000 payments.

	Required:
A.	Develop a table showing the percent of individual activity cost to the total process cost.
B.	Determine the average total process cost per vendor payment, assuming 18,000 payments.
C.	Prepare a table showing the improvements in the activity costs as a result of the changes proposed by management. If an amount is zero, enter "0".
D.	Estimate the average cost per vendor payment, assuming that the changes proposed by management are enacted for 18,000 total payments. If required, round your answers to the nearest cent.

Answer 1

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