Noguchi Company manufactures cooling systems. Noguchi produces all the parts necessary for its product except for one electronic component, which is purchased from two local suppliers: Manzer Inc. and Buckner Company. Both suppliers are reliable and seldom deliver late; however, Manzer sells the component for $89 per unit, while Buckner sells the same component for $86. Noguchi purchases 80% of its components from Buckner because of its lower price. The total annual demand is 4,000,000 components. To help assess the cost effect of the two components, the following data were collected for supplier-related activities and suppliers:
I. Activity Data
Inspecting components (sampling only)
Reworking products (due to failed component)
Warranty work (due to failed component)
Activity Cost
$825,000
7,370,000
9,970,000
II. Supplier Data
Manzer Inc.
Buckner Company
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
*Sampling inspection for Manzer’s product 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 supplier-related activities and using the current prices and sales volume. (Note: Round the intermediate calculations to the whole number for the following activity rates: “Reworking products” and “Warranty work”. Round the unit cost to two decimal places.)
Manzer Inc.
$ \boxed{90.25} $ per unit
Buckner Company
$ \boxed{} $ per unit
2. Suppose that Noguchi loses $2,856,000 in sales per year because it develops a poor reputation due to defective units attributable to failed components. Using warranty hours, assign the cost of lost sales to each supplier.
Manzer
Buckner
2b. By how much would this change the cost of each supplier’s component? Round your answers to the nearest cent.
Manzer
Buckner
3. Based on the analysis in Requirements 1 and 2, discuss the importance of activity-based supplier costing for internal decision making.
As with product costing, accurate assignment of costs to the cost object is essential for well-grounded decision-making. Suppliers can cause a firm to perform costly activities such as inspection, rework, and warranty work. The ______ of a component is thus more than its purchase price. As this example ______.
