Bowman Company manufactures cooling systems. Bowman produces all the parts neces

Question

Bowman Company manufactures cooling systems. Bowman 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. Bowman 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

II. Supplier Data

* 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 unit cost to two decimal places.)

2a. Suppose that Bowman loses $3,350,000 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.

2b. By how much would this change the cost of each supplier's component? Round your answers to the nearest cent.

Activity Cost Inspecting components (sampling only) $565,000 Reworking products (due to failed component) 8,520,000 Warranty work (due to failed component) 8,770,000

Explanation / Answer

calculating cost per component

Inspecting component - distributed on basis of sampling hours

Reworking Products - distributed on basis of rework hours

Warranty Work - distributed on basis of warranty hours

Activity Cost Base Manzer Bucker Purchase 800000 89 per unit 71200000 3200000 86 per unit 275200000 Inspecting component 565000 80 : 3920 11300 553700 Reworking Products 8520000 360: 5640 511200 8008800 Warranty Work 8770000 800 : 15200 438500 8331500 Total 72161000 292094000 Components 800000 3200000 cost per component 90.20 91.28

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