Soft Glow, Inc. manufactures light bulbs. Their purchasing policy requires that
ID: 2480479 • Letter: S
Question
Soft Glow, Inc. manufactures light bulbs. Their purchasing policy requires that the purchasing agents place each quarter's purchasing requirements out for bid. This is because the Purchasing Department is evaluated solely by its ability to get the lowest purchase prices. The lowest bidder receives the order for the next quarter (90 working days).
To make its bulb products, Soft Glow requires 45,000 pounds of glass per quarter. Soft Glow received two glass bids for the third quarter, as follows:
Mid-States Glass Company: $28.00 per pound of glass. Delivery schedule: 45,000 (500 lbs. x 90 days) pounds at the beginning of July to last for 3 months.
Cleveland Glass Company: $28.20 per pound of glass. Delivery schedule: 500 pounds per working day (90 days in the quarter).
Soft Glow accepted Mid-States Glass Company's bid because it was the low-cost bid.
Required:
1. All of the following are ways in which Soft Glow could develop long-term partnerships with its suppliers except:
share research and development efforts.
ignore internal costs caused by delivery delays while contracting on the best price point basis.
share production schedules.
establish electronic data interchange.
establish supplier raw materials logistical support.
2. Hidden costs beyond the price of Mid-States Glass Company's bid include all of the following except:
3. Considering just inventory financing costs, what is the additional cost per pound of Mid-States Glass Company's bid if the annual cost of money is 10%? Round to the nearest cent.
$ per lb.
Explanation / Answer
Answer:1 ignore internal costs caused by delivery delays while contracting on the best price point basis.
Answer:2 The hidden costs beyond the price include the costs associated with the higher inventory required by Mid-State’s delivery schedule. These inventory costs include additional space, handling, obsolescence, financing, and materials management costs. These costs were not considered because they are not obvious. They are also difficult to determine. The price is obvious, so it is easy to build a purchasing policy around “getting the best price.” This policy ignores the additional internal costs of the higher inventory imposed by Mid-State’s delivery schedule. These are costs incurred by other parts of the organization, not purchasing. In a functional organization, purchasing would respond by saying that the additional internal inventory costs are notits problem. Those are costs incurred in another manager’s responsibility center. Of course, this is part of the problem of such simple “low-price bid” policies.
Answer:3 If the financing costs are 10%, then the additional cost of the inventory could be determined as follows:
At the beginning of July, the new shipment of 45,000 pounds arrives. Assuming that the glass supply runs out by the end of the quarter, the
Beginning of July. .......................................................... 45,000
End of September. ......................................................... 0
Total. .......................................................................... 45,000 ÷ 2
Average pounds in inventory for the quarter. .............. 22,500
The inventory carrying cost can be estimated as follows:
Average pounds in inventory for the quarter. .......... 22500
Price per pound. ........................................................ × $28
Total inventory investment. ....................................... $630,000
Interest rate per quarter (10% ÷ 4). ........................... × 2.5%
Inventory financing cost per quarter. ....................... $ 15750
Inventory financing cost per quarter. ....................... $ 15750
Number of pounds ordered for the quarter. ............. ÷ 45,000 lbs.
Additional cost per pound. ....................................... $ 0.35 /lb.
The financing cost is 2.5% of the average quarterly inventory value, or $15750 per quarter. This translates into an additional 35¢ per pound ($15750 ÷ 45,000 lbs.) purchased during the quarter. Thus, just considering the financing cost by itself makes Akron Glass the “real” low-cost bidder.
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