Activity-Based Supplier Costing

Noguchi Company manufactures cooling systems. Noguchi 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. Noguchi 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

Line Item Description	Activity Cost
Inspecting components (sampling only)	$830,000
Reworking products (due to failed component)	8,720,000
Warranty work (due to failed component)	11,070,000

II. Supplier Data

Line Item Description	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 Manzer's 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.)

Line Item Description	Cost
Manzer Inc.
Buckner Company

2a. Suppose that Noguchi loses $4,352,000 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.

Line Item Description	Cost
Manzer
Buckner

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

Line Item Description	Change	Cost
Manzer
Buckner

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 fill in the blank 1 of 3

total cost or rework cost or activity cost

of a component is thus more than its purchase price. As this example shows, the component with the fill in the blank 2 of 3

lower or higher

price is actually less expensive because it causes less demand on internal costly activities. Thus, the company would likely fill in the blank 3 of 3

decrease or increase

the purchases of 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.

2a. Determine additional warranty cost by dividing loss by total warranty hours for a rate to apply to each supplier. Multiply this rate by the respective vendor's warranty hours for total.

2b. To determine the unit cost increase, divide the vendor total by the units supplied.