Question

Clearsound uses Alpha Electronics and La Paz Company to buy two electronic components used in the manufacture of its cell phones: Component 125X and Component 30Y. Consider two activities: testing components and reordering components. After the two components are inserted, testing is done to ensure that the two components in the phones are working properly. Reordering occurs because one or both of the components have failed the test and it is necessary to replenish component inventories. Activity cost information and other data needed for supplier costing are as follows:

I. Activity Costs Caused by Suppliers (testing failures and reordering as a result)

Activity	Costs
Testing components	$1,200,000
Reordering components	300,000

II. Supplier Data

	Alpha Electronics							La Paz Company
	125X			30Y				125X			30Y
Unit purchase price	$10			$26				$12			$28
Units purchased	120,000			60,000				15,000			15,000
Failed tests	1,200			780				10			10
Number of reorders	60			40				0			0

Required:

Determine the cost of each supplier by using ABC. Round unit costs to two decimal places.

	Alpha Electronics			La Paz Company
	125X	30Y		125X	30Y
Unit cost:	$	$		$	$

Answer 1

Let us first note the cost driver for each of the activity costs:

Activity	Cost Driver	Total
Testing Components	Failed Tests	1200+780+10+10 = 2000
Reordering components	Number of reorders	60+40+0+0 = 100

Therefore, Determination of Total Activity Costs per unit:

For Alpha Electronics
125X					30Y
Activity	Activity Cost	Allocated Cost driver		Allocated Cost	Activity	Activity Cost	Cost driver		Allocated Cost
Testing Components	1200000	1200 Failed Tests	1200000 * 1200 / 2000	720000	Testing Components	1200000	780 Failed Tests	1200000 * 780 / 2000	468000
Reordering components	300000	60 Number of reorders	300000 * 60 / 100	180000	Reordering components	300000	40 Number of reorders	300000 * 40 / 100	120000
Total Allocated Cost				900000					588000
Total Number of units				120000					60000
Allocated Cost per unit				7.5					9.8

125X					30Y
Activity	Activity Cost	Allocated Cost driver		Allocated Cost	Activity	Activity Cost	Cost driver		Allocated Cost
Testing Components	1200000	10 Failed Tests	1200000 * 10 / 2000	6000	Testing Components	1200000	10 Failed Tests	1200000 * 10 / 2000	6000
Reordering components	300000	0 Number of reorders	300000 * 0 / 100	0	Reordering components	300000	0 Number of reorders	300000 * 0 / 100	0
Total Allocated Cost				6000					6000
Total Number of units				15000					15000
Allocated Cost per unit				0.4					0.4
(Total Allocated Cost / Total Number of units)

Therefore, Total Unit Cost:

	Alpha Electronics		La Paz Company
	125X	30Y	125X	30Y
Unit Purchase Price	10	26	12	28
Unit Allocated Cost	7.5	9.8	0.4	0.4
Total Unit Price	17.50	35.80	12.40	28.40