ColdAs Company manufactures cooling systems. ColdAs produces all of the parts necessary for its product except for one electronic component, which is purchased from two local suppliers: LocalGuys Ltd and JamesStreet Company. Both suppliers are reliable and seldom deliver late; however, LocalGuys sells the component for $89 per unit, while JamesStreet sells the same component for $86. ColdAs purchases 80% of its components from JamesStreet because of its lower component price. The total annual demand is 4 000 000 components. To help assess the costs of the two suppliers, the following data were collected for (i) supplier related activities and (ii) for each supplier:

Activity type information	Total Activity Cost
Inspecting components (sampling only)	$ 480 000
Reworking products (due to failed component)	6 084 000
Warranty work (due to failed component)	9 600 000

Supplier data	LocalGuys	JamesStreet
Electronic component 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

*Local Guyss sampling inspection has been reduced because the reject rate is so low.

REQUIRED: All requirements must be answered

1 Calculate the cost per component for each supplier, taking into consideration the costs of the supplier-related activities and using the electronic component current unit purchase price and sales volume. (Note: Round the unit cost to two decimal places.)

2 Suppose that ColdAs loses $4,000,000 in sales per year (hidden costs) because it develops a poor reputation due to defective units attributable to failed components. Using warranty hours, assign the hidden cost of lost sales to each supplier. By how much would this change the cost of each suppliers component? (Round to two decimal places.)

3 Based on the analysis in requirements 1 and 2, calculate the revised total supplier-related activities cost per supplier.

4 Use this revised total supplier-related activities cost per supplier as the basis to discuss why and how activity-based supplier costing is import for internal decision making, especially concerning which costs to use in determining the selection of a supplier.