Amado, Inc., manufactures riding lawn mowers. Amado uses JIT manufacturing and carries insignificant levels of inventory. Amado manufactures everything needed for the riding lawn mowers except for the engines. Several sizes of mowers are produced. The most popular line is the small mower line. The engines for the small mower line are purchased from two sources: Rivera Engines and Bach Machining. The Rivera engine is the more expensive of the two sources and has a price of $300. The Bach engine is $270 per unit. Amado produces and sells 13,200 units of the small mower. Of the 13,200 engines purchased, 2,400 are purchased from Rivera Engines, and 10,800 are purchased from Bach Machining. Although Bill Jackson, production manager, prefers the Rivera engine, Carlos Lopez, purchasing manager, maintains that the price difference is too great to buy more than the 2,400 units currently purchased. Carlos, however, does want to maintain a significant connection with Rivera just in case the less expensive source cannot supply the needed quantities. Even though Bill understands the price argument, he has argued in many meetings that the quality of the Rivera engine is worth the price difference.

Carlos remains unconvinced.

Sam Miller, controller, has recently overseen the implementation of an activity-based costing system. He has indicated that an ABC analysis would shed some light on the conflict between production and purchasing. To support this position, the following data have been collected:

I. Activity cost data:

Required:
1. Calculate the total supplier cost (acquisition cost plus supplier-related activity costs).
Convert this to a per-engine cost to find out how much the company is paying for the engines. Which of the two suppliers is the low-cost supplier? Explain why this is a better measure of engine cost than the usual purchase costs assigned to the engines.
2. Consider the supplier cost information obtained in Requirement 1. Suppose further that Rivera can supply only a total of 6,000 units. What actions would you advise Amado to undertake with its suppliers? Comment on the strategic value of activitybased supplier costing.

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Testing engines Reworking products b $240,000 400,000 Expediting orders 300,000 Repairing engines 540,000