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 $61 per unit, while Curtis sells the same component for $55. 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 177,000 carburetors.
Harvey's 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 Curtis's 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 132,750 or more units, Harvey will sell the component for $58 per unit with a contractual provision for an annual product-specific inflationary adjustment.
Jackson's 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) $ 194,790
Expediting work (due to late delivery) 145,700
Reworking products (due to failed component) 957,940
Warranty work (due to failed component) 1,917,190
II. Supplier data:
Harvey Curtis
Unit purchase price $61 $55
Units purchased 44,250 132,750
Expediting orders 30 280
Sampling hours* 110 4,420
Rework hours 250 4,290
Warranty hours 280 5,730
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 for each
Inspecting components for each
Expediting work for each
Reworking products for each
Warranty work for each
Total supplier cost for each
Units supplied for each
Unit cost
Given this information, what do you think the purchasing manager ought to do?
2. The Quality Control Department estimates that the company loses $3,401,660 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?
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.
$ per unit