Activity-Based Supplier Costing

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)	$495,000
Reworking products (due to failed component)	7,420,000
Warranty work (due to failed component)	9,770,000

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 Manzers product has been reduced because the reject rate is so low.

Required:

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 intermediate calculations to the whole number for the following activity rates: "Reworking products" and "Warranty work". Round the unit cost to two decimal places.)

Manzer Inc.	$ per unit
Buckner Company	$ per unit

2a. Suppose that Bowman loses $3,648,000 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.

Manzer	$
Buckner	$

2b. By how much would this change the cost of each supplier's component? Round your answers to the nearest cent.

Manzer	unit cost decrease or unit cost increase	$
Buckner	unit cost decrease or unit cost increase	$

3. Based on the analysis in Requirements 1 and 2, discuss the importance of activity-based supplier costing for internal decision making.

As with product costing, accurate assignment of costs to the cost object is essential for well-grounded decision making. Suppliers can cause a firm to perform costly activities such as inspection, rework, and warranty work. The

total costrework or costactivity cost

of a component is thus more than its purchase price. As this example shows, the component with the

lower or higher

price is actually less expensive because it causes less demand on internal costly activities. Thus, the company would likely

decrease or increase

the purchases of the one supplier in favor of the other. It also might attempt to work with the one supplier which is causing significant demands on internal activities to see if the quality of its component can be increased.