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Topic Management accounting problem (case study) Task details Testa Limited manufactures small cars and 1lede Sydney More than 80 per cent or thecost or the company's cars consists or matenais and components, which are purchased from Australian suppliers About three years ago, Testa Introduced a comprehensive supplier evaluation system to monitorthe performance of its suppliers Each supplier was given a threeyear contract that guaranteed large orders aslpngas t performed according to Testa's strict requirements Each supplier's performance was measured by considering its adherence to delivery schedules (Testa works on a JIT system), accuracy oi orders delivered, number oi components rejected on delivery, and its achievements in reducing its production costs (and, therefore, its material and component prices) over the contract period Pertormanceln all of these areas will determine whether Testa renews the supplier's w offers the Contract to another supplier The suppliers are aware that, there are many alternative component suppliers who wouidbe eager to enter. into a longrterm contract with Testa Alter holding discussions with the purchasing manager, as part of the review process, the nancial controller has conducted a study to deterrnlne the full cost of dealing with suppliers While the company uses a series of nonenancial performance measures to measure most aspects or supplier performance, the nancial controller believes that the calculation oi the total cosl oi ownership will provide an add tionaiperspeclive to Viewing supplier performance. For the most recent year, the foilowtng supplierrrelated activities and costs have been Identied ACTIVITY TOTAL COST NUMBER OF ACTIVITIES Order components from supplier $1 800 000 6 000 orders Receive order $9 000 000 10 000 deliveries Return re yect components to supplier $39 500 55 relums Receive late deliveries $260 000 130 late deliveries Production downtime due to late delivery $2 400 000 800 hours Production downtime due to defective material $3 600 000 3 000 hours Process invoice and pay supplier $1 050 000 3 000 invoices Dispute invoice amount $40 000 so disputes Quality audlt of supplier $500 000 10 audits Testa obtains Its exhaust systems from two suppliers Hot Exhausts and Chrome Manufacturers Last year,Testa purchased 3 000 was from Hot Exhausts at $100 per unit, and 4 000 units irom Chrome Manufacturers at $90 per unit Both suppliers provide an identical component The analysis revealed that last year the following adlvmes related to the two suppliers ACTIVITY HOT EXHAUSTS CHROME MANUFACTURERS Order components irom supplier 90 orders 130 orders Receive order 90 deliveries 150 deliveries Return re yect components to supplier 15 returns 16 returns Receive late deliveries Slate deliveries 28 late deliveries Production downtime due to late delivery 45 hours 59 hours Production downtime due to detective material 20 hours 29 hours Process invoice and pay supplier 12 invoices 130 invoices Dispute invoice amount 3 disputes 3 disputes Quality audt or supplier 1 audit 2 audits Required t Determine the cost per unit of activity dnver for each supplierrreiated activity 2 Calculate the total cost or ownership and the permit cost of ownership tor the two suppliers 3 Calculate the supplier performance index for the two suppliers Uta Analyselhe perrormance or the two suppliers What Is the total cost of ownership and the perrunlt cost of ownership for Chrome Manufacturers if thenumper of late delivenes is reduced to 12 and the production downtime due to late deliveries Is reduced to 30 hours? Describe the changes that the purchasing manager and the iinanciai controller could implement tom suppliererelated costs Consider the various criteria used by Testa to determine whether_pr_mt supplier contracts should berenewed For each criterion, suggest two performance measures that Testa might use to evaluate a suppliers perroirnance Testa is considering implementing electronic systems for transacting with suppliers Outline someadvantages that might accrueto both Testa and ts suppliers for such systems What is the meaning of a collaborative relationship With a supplier and how can Testa Limited benetfrom having a co iiaborative relationship with its suppliers