Katharine Johnson is the owner of Best Bikes, a company that produces high-quali
ID: 2521897 • Letter: K
Question
Katharine Johnson is the owner of Best Bikes, a company that produces high-quality cross-country bicycles. Best Bikes participates in a supply chain that consists of suppliers, manufacturers distributors, and elite bicycle shops. For several years Best Bikes has purchased titanium from suppliers in the supply chain. Best Bikes uses titanium for the bicycle frames because it is stronger and lighter than other metals and therefore increases the quality of the bicycle. Earlier this year, Best Bikes hired Michael Bentfield, a recent graduate from State University, as purchasing manager. Michael believed that he could reduce costs if he purchased titanium from an online marketplace at a lower price. Best Bikes established the following standards based upon the company's experience with previous suppliers. The standards are as follows: Cost of titanium $18 per pound Titanium used per bicycle 8 lbs S. Actual results for the first month using the online supplier of titanium are as follows: Bicycles produced Titanium purchased Titanium used in production 400 5,200 lb. for $88,400 4,700 lb Required: 1. Compute the direct materials price and efficiency variances. 2. What factors can explain the variances identified in requirement 1? Could any other variances be affected? 3. Was switching suppliers a good idea for Best Bikes? Explain why or why not.Explanation / Answer
Answer for 1)
Material price variance:
(Standard price(suppliers) - actual price(online))×actual quantity used
($18-$88400/5200 lb)×4700
=$4700 favorrable
Direct material efficiency variance:
(Standard quantity(quantity required if supplied by supplier)-actual quantity)×standard price
(400 bikes×8lbs-4700 lbs)×$18
$27000 unfavorable
Answer for 2)
The factors for variances:
1)The price variance is due to decline in price per pound by purchasing the titanium online rather than for supplier in supply chain.
2)The efficiency variance is due to use of excessive titanium per bike compared to standard that may be due to lack of quality in the titanium purchased from online market.
The Total direct material variance will be affected and if any variance calculated on basis of direct material not in most of cases but may be a chance for calculating overhead on basis of materials used may get affected.
3)First of all must find the reason for use of excess direct material than actual and if the reason is due to lack of quality in the direct material purchased from online market place,then switching to the supplier is the best option available.
The direct material variance is $22300($27000-$4700) and if it is caused due to lack of quality then it is better to switch.
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