External Linkages, Activity-Based Supplier Costing

Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the production of the cycles except for one (a carburetor). This component is purchased from two local suppliers: Harvey Parts and Curtis, Inc. Harvey sells the component for $66 per unit, while Curtis sells the same component for $59. Because of the lower price, Jackson purchases 75 percent of its components from Curtis. Jackson purchases the remaining 25 percent from Harvey to ensure an alternative source. The total annual demand is 153,000 carburetors.

Harveys sales manager is pushing Jackson to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Curtiss lower-quality component. Harvey has sufficient capacity to supply all the carburetors needed and is asking for a long-term contract. With a five-year contract for 114,750 or more units, Harvey will sell the component for $63 per unit with a contractual provision for an annual product-specific inflationary adjustment. Jacksons purchasing manager is intrigued by the offer and wonders if the higher-quality carburetor actually does cost less than the lower-quality Curtis carburetor. To help assess the cost effect of the two products, the following data were collected for quality-related activities and suppliers:

I. Activity data:
	Activity	Cost
	Inspecting components (sampling only)	$	173,160
	Expediting work (due to late delivery)		153,760
	Reworking products (due to failed component)		974,460
	Warranty work (due to failed component)		1,889,680

II. Supplier data:
		Harvey	Curtis
	Unit purchase price	$66	$59
	Units purchased	38,250	114,750
	Expediting orders	20	290
	Sampling hours*	70	4,370
	Rework hours	260	4,210
	Warranty hours	330	5,650

* The Quality Control Department indicates that sampling inspection for the Harvey component 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 quality-related activities and using the current prices and sales volume. If required, round your unit cost answers to the nearest cent.

	Harvey	Curtis
Purchase cost	$fill in the blank 1	$fill in the blank 2
Inspecting components	fill in the blank 3	fill in the blank 4
Expediting work	fill in the blank 5	fill in the blank 6
Reworking products	fill in the blank 7	fill in the blank 8
Warranty work	fill in the blank 9	fill in the blank 10
Total supplier cost	$fill in the blank 11	$fill in the blank 12
Units supplied	fill in the blank 13	fill in the blank 14
Unit cost	$fill in the blank 15	$fill in the blank 16

Given this information, what do you think the purchasing manager ought to do?

Accept Harvey's contractual offer

2. The Quality Control Department estimates that the company loses $3,366,740 in sales per year because of the reputation effect of defective units attributable to failed components. Suppose that you had to assign the cost of lost sales to each supplier using one of the drivers already listed. Which would you choose? Warranty hours

Using this driver, calculate the change in the unit cost of the Curtis carburetor attributable to lost sales. If required, round your answer to the nearest cent. $fill in the blank 19 per unit