Soft Glow, Inc. manufactures light bulbs. Their purchasing policy requires that the purchasing agents place each quarter's purchasing requirements out for bid. This is because the Purchasing Department is evaluated solely by its ability to get the lowest purchase prices. The lowest bidder receives the order for the next quarter (90 working days).

To make its bulb products, Soft Glow requires 45,000 pounds of glass per quarter. Soft Glow received two glass bids for the third quarter, as follows:

• Mid-States Glass Company: $28.00 per pound of glass. Delivery schedule: 45,000 (500 lbs. × 90 days) pounds at the beginning of July to last for 3 months.

• Cleveland Glass Company: $28.20 per pound of glass. Delivery schedule: 500 pounds per working day (90 days in the quarter).-

Soft Glow accepted Mid-States Glass Company's bid because it was the low-cost bid.

Instructions

1. Comment on Soft Glow's purchasing policy.

2. What are the additional (hidden) costs, beyond price, of Mid-States Glass Company's bid? Why weren't these costs considered?

3. Considering just inventory financing costs, what is the additional cost per pound of Mid-States Glass Company's bid if the annual cost of money is 10%? (Hint: Determine the average value of glass inventory held for the quarter and multiply by the quarterly interest charge, then divide by the number of pounds.)