Zavner Company manufactures dental equipment. Zavner produces all the components necessary for the production of its product except for one. This component is purchased from two local suppliers: Grayson Machining and Lambert, Inc. Grayson sells the component for $144 per unit, while Lambert sells the same component for $129. Because of the lower price, Zavner purchases 80 percent of its components from Lambert. Zavner purchases the remaining 20 percent from Grayson to ensure an alternative source. The total annual demand is 1,000,000 components.

Grayson's sales manager is pushing Zavner to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Lambert's lower-quality component. Grayson has sufficient capacity to supply all the components needed and is asking for a long-term contract. With a five-year contract for 800,000 or more units, Grayson will sell the component for $135 per unit. Zavner's purchasing manager is intrigued by the offer and wonders if the higher-quality component actually does cost less than the lower-quality Lambert component. To help assess the cost effect of the two components, the following data were collected for quality-related activities and suppliers:

I. Activity data:

Activity Cost

Inspecting components (sampling only) ...... $ 1,200,000

Expediting work (due to late delivery) ........ 960,000

Reworking products (due to failed component) . 6,844,500

Warranty work (due to failed component) .... 21,600,000

II. Supplier data:

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. Given this information, what do you think the purchasing manager ought to do? Explain.
2. Suppose the quality control department estimates that the company loses $4,500,000 in sales per year because of the reputation effect of defective units attributable to failed components. What information would you like to have to assign this cost to each supplier? 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? Using this driver, calculate the change in the cost of the Lambert component attributable to lostsales.

Transcribed Image Text:

Grayson Lambert $144 200,000 20 Unit purchase price Units purchased Sampling hours* Expediting orders Rework hours Warranty hours The quality control department indicates that sampling inspection for the Grayson component has been reduced because the reject rate is so low $129 800,000 980 90 1,410 3,800 90 200