Topic: Management accounting problem (case study). Task details: Dreamy Limited manufactures Jet skis in Melbourne. More than 70 per cent of the cost of the company's skis consists of materials and components, which are purchased from Australian suppliers. About three years ago, Dreamy Limited introduced a comprehensive supplier evaluation system to monitor the performance of its suppliers. Each supplier was given a three-year contract that guaranteed large orders as long as it performed according to Dreamy's strict requirements. Each supplier's performance was measured by considering its adherence to delivery schedules, accuracy of orders delivered, number of components rejected on delivery, and its achievements in reducing its production costs (and, therefore, its material and component prices) over the contract period. Performance in all of these arears will determine whether Dreamy renews the supplier's contract or offers the contract to another supplier. The suppliers are aware that there are many alternative component suppliers who would be eager to enter into a long-term contract with Dreamy. After holding discussions with the purchasing manager, as part of the review process, the financial controller has conducted a study to determine the full cost of dealing with suppliers. While the company uses a series of non-financial performance measures to measure most aspects of supplier performance, the financial controller believes that the calculation of the total cost of ownership will provide an additional perspective to viewing supplier performance. For the most recent year, the following supplier-related activities and costs have been identified: ACTIVITY TOTAL COST NUMBER OF ACTIVITIES Order components from supplier $1 900 000 7 000 orders Receive order $10 000 000 12 000 deliveries Return reject components to supplier $28 500 60 returns Receive late deliveries $360 000 150 late deliveries Production downtime due to late delivery $3 400 000 900 hours Production downtime due to defective material $2 600 000 4 000 hours Process invoice and pay supplier $2 050 000 4 000 invoices Dispute invoice amount $100 000 80 disputes Quality audit of supplier $600 000 12 audits Dreamy obtains handlebar steering for the jet skis from two suppliers: Roted Limited and Ter Manufacturers. Last year, Dreamy purchased 3 500 units from Roted Limited at $110 per unit, and 4 500 units from Ter Manufacturers at $99 per unit. Both suppliers provide an identical component. The analysis revealed that last year the following activities related to the two suppliers: ACTIVITY ROTED LIMITED TER MANUFACTURERS Order components from supplier 100 orders 140 orders Receive order 90 deliveries 150 deliveries Return reject components to supplier 17 returns 19 returns Receive late deliveries 5 late deliveries 30 late deliveries Production downtime due to late delivery 50 hours 65 hours Production downtime due to defective material 22 hours 32 hours Process invoice and pay supplier 11 invoices 129 invoices Dispute invoice amount 4 disputes 4 disputes Quality audit of supplier 2 audits 3 audits Required: 1. Calculate the total cost of ownership and the per unit cost of ownership for the two suppliers. 2. Calculate the supplier performance index for the two suppliers. 3. Analyse the performance of the two suppliers. 4. What is the total cost of ownership and the per unit cost of ownership for Ter Manufacturers if the number of late deliveries is reduced by 40% and the production downtime due to late deliveries is reduced to 30 hours? Analyse the relative performance of the two suppliers. 5. Describe the changes that the purchasing manager and the financial controller could implement to minimise supplier-related costs. 6. Consider the various criteria used by Dreamy to determine whether or not supplier contracts should be renewed. For each criterion, suggest two performance measures that Dreamy might use to evaluate supplier's performance. 7. Recently Dreamy discovered another supplier, Dorait Limited, is supplying the same handlebar steering for only $65 per unit. Do you think Dreamy should enter a three-year contract with Dorait Limited? Explain your
