The procurement process for Li Wholesale Company includes a series of activities

Question

The procurement process for Li Wholesale Company includes a series of activities that transforms a materials requisition into a vendor check. The process begins with a request for materials. The requesting department prepares and sends a materials request form to the Purchasing Department. The Purchasing Department then places a request for a quote to vendors. Vendors prepare bids in response to the request for a quote. A vendor is selected based on the lowest bid. A purchase order to the low-bid vendor is prepared. The vendor delivers the materials to the company, whereupon a receiving ticket is prepared. Payment to the vendor is authorized if the materials request form, receiving ticket, and vendor invoice are in agreement. These three documents fail to agree 50% of the time, initiating effort to reconcile the differences. Once the three documents agree, a check is issued. The process can be diagrammed as follows: An activity analysis indicated the following activity costs with this process: Preparing materials request $16,200 Requesting, receiving, and selecting vendor bids 48,600 Preparing purchase order 10,800 Preparing receiving ticket 14,400 Matching M/R, R/T, and invoice 19,800 Correcting reconciliation differences 48,600 Preparing and delivering vendor payment 21,600 Total process activity cost $180,000 On average, the process handles 30,000 individual requests for materials that result in 30,000 individual payments to vendors. Management proposes to improve this process in two ways. First, the Purchasing Department will develop a preapproved vendor list for which orders can be placed without a request for quote. It is expected that this will reduce the cost of requesting and receiving vendor bids by 75%. Second, additional training and standardization will be provided to reduce errors introduced into the materials requisition form and receiving tickets. It is expected that this will reduce the number of reconciliation differences from 50% to 25%, over an average of 30,000 payments. Hide Hint(s) a. Develop a table showing the percent of individual activity cost to the total process cost. Round percentages to the nearest whole number, if required. Determine the average total process cost per vendor payment, assuming 30,000 payments. Round to the nearest cent, if required. $ per payment Prepare a table showing the improvements in the activity costs as a result of the changes proposed by management. If an amount box does not require an entry, leave it blank or enter "0". Use the minus sign to indicate an additional cost in the last column. Estimate the average cost per vendor payment, assuming that the changes proposed by management are enacted for 30,000 total payments. Round to the nearest cent. $ per payment

Explanation / Answer

Answer 1 Table showing percentage of activity cost to total cost Sl. no. Activity (30,000 activities) activity cost Percentage of total cost 1 Material request 16200 9% 2 Request receiving & select vendor bid 48600 27% 3 Purchase order 10800 6% 4 Receiving Ticket 14400 8% 5 Matching M/R, R/T invoice 19800 11% 6 Correct Reconcilliation difference 48600 27% 7 Preparing & delivering vendor payment 21600 12% Total Cost 180000 100% Answer 2 Avgerage total process cost per vendor payment = 180000/30000 = $ 6 Answer 3 After Management Propsal Table showing percentage of activity cost to total cost Sl. no. Activity (30,000 activities) activity cost Percentage of total cost 1 Material request 16200 14% 2 Request receiving & select vendor bid 12150 10% 3 Purchase order 10800 9% 4 Receiving Ticket 14400 12% 5 Matching M/R, R/T invoice 19800 17% 6 Correct Reconcilliation difference 24300 20% 7 Preparing & delivering vendor payment 21600 18% Total Cost 119250 100% Answer 4 After mangement propsal, Avgerage total process cost per vendor payment = 119250/30000 = $ 3.98

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