Katharine Johnson is the owner of Better Bikes, a company that produces high qua
ID: 2599177 • Letter: K
Question
Katharine Johnson is the owner of Better Bikes, a company that produces high quality cross-country bicycles. Better Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite bicycle shops. For several years Better Bikes has purchased titanium from suppliers in the supply chain. Better 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, Better Bikes hired Samson, a recent graduate from StateUniversity, as purchasing manager. Michael believed that he could reduce costs if he purchased titanium from an online marketplace at a lower price.
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 Better Bikes? Explain why or why not.
4.
Should Michael Samson's performance evaluation be based solely on pricevariances? Should the production manager's evaluation be based solely on efficiency variances? Why is it important for Katharine Johnson to understand the causes of a variance before she evaluates performance?
5.
Other than performance evaluation, what reasons are there for calculatingvariances?
6.
What future problems could result from Better Bikes' decision to buy a lower quality of titanium from the online marketplace?
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 Better Bikes? Explain why or why not.
4.
Should Michael Samson's performance evaluation be based solely on pricevariances? Should the production manager's evaluation be based solely on efficiency variances? Why is it important for Katharine Johnson to understand the causes of a variance before she evaluates performance?
5.
Other than performance evaluation, what reasons are there for calculatingvariances?
6.
What future problems could result from Better Bikes' decision to buy a lower quality of titanium from the online marketplace?
Data Table Better Bikes established the following standards based upon the company's experience with their previous suppliers. The standards are as follows: Cost of titanium $ 23 per pound Titanium used per bicycle 8 lbs. Actual results for the first month using the online supplier of titanium are as follows: Bicycles produced Titanium purchased Titanium used in production 500 6,500 lb. for $143,000 5,000 lbExplanation / Answer
1.
Compute the direct materials price and efficiency variances.
Direct Materials Price = 5000 lb used * cost per lb
Cost per lb = $143000/6500 = $22
Direct Materials Price = 5000 * $22 = $110,000
Efficiency Variance = (Actual lb * Standard Rate) - (Standard lb * Standard Rate)
Actual lb used for production per bicycle = 5000/500 = 10 lb
Efficiency Variance = (10* 23) - (8*23) = 230 - 184 = 46 per bicycle
2.
What factors can explain the variances identified in requirement 1? Could any other variances be affected?
Answer: The reason for variances in the above question is from the reasons.
Better bikes uses more of titanium in production than the standard rate of 8 lb per bicycle. Better Bikes uses 10 lb per bike in the production, ordered from online store.
Extra lb of titanium used in the production by Better bikes = 2 lb...Because of which the price is inflated in the purchase of titanium from the previous suppliers
Although the purchase price of titanium is lesser than the standard market rate of $23. Still the variance majorly came from extra consumption of titanium by 2 lb per bicycle if ordered from online store..
3.
Was switching suppliers a good idea for Better Bikes? Explain why or why not.
No it wasnt a good idea to switch from previous suppliers to online store, because of the extra cost of producing a bicycle from the materials from onlne store. Better bikes is incurring an extra cost of $36 per bicycle, if purchased from online store.
Cost per bicycle from previous suppliers = $23 * 8 lb = $184
Cost per bicycle from onine store = $22 * 10 lb = $220
Extra cost if materials purchased through online store = $220 - $184 = $36.
Therefore its a wrong decision to buy from online store.
4.
Should Michael Samson's performance evaluation be based solely on pricevariances? Should the production manager's evaluation be based solely on efficiency variances? Why is it important for Katharine Johnson to understand the causes of a variance before she evaluates performance?
Answer: It would not be wise to evaluate the performance of Michael Samson's Performance solely on the price variances. Efficiency variance is also very very important to consider, because since because of the poor quality of materials ordered from online store, Better Bikes now consume 2 lb extra per bicycle production, which over all increases the cost price of the bicycle. Had Katherine only judged on the basis of price variance, she would have chosen the online store option, because it was available $1 cheaper. Thats the reason Katherine should understand the causes of variance before evaluating performance.
1.
Compute the direct materials price and efficiency variances.
Direct Materials Price = 5000 lb used * cost per lb
Cost per lb = $143000/6500 = $22
Direct Materials Price = 5000 * $22 = $110,000
Efficiency Variance = (Actual lb * Standard Rate) - (Standard lb * Standard Rate)
Actual lb used for production per bicycle = 5000/500 = 10 lb
Efficiency Variance = (10* 23) - (8*23) = 230 - 184 = 46 per bicycle
2.
What factors can explain the variances identified in requirement 1? Could any other variances be affected?
Answer: The reason for variances in the above question is from the reasons.
Better bikes uses more of titanium in production than the standard rate of 8 lb per bicycle. Better Bikes uses 10 lb per bike in the production, ordered from online store.
Extra lb of titanium used in the production by Better bikes = 2 lb...Because of which the price is inflated in the purchase of titanium from the previous suppliers
Although the purchase price of titanium is lesser than the standard market rate of $23. Still the variance majorly came from extra consumption of titanium by 2 lb per bicycle if ordered from online store..
3.
Was switching suppliers a good idea for Better Bikes? Explain why or why not.
No it wasnt a good idea to switch from previous suppliers to online store, because of the extra cost of producing a bicycle from the materials from onlne store. Better bikes is incurring an extra cost of $36 per bicycle, if purchased from online store.
Cost per bicycle from previous suppliers = $23 * 8 lb = $184
Cost per bicycle from onine store = $22 * 10 lb = $220
Extra cost if materials purchased through online store = $220 - $184 = $36.
Therefore its a wrong decision to buy from online store.
4.
Should Michael Samson's performance evaluation be based solely on pricevariances? Should the production manager's evaluation be based solely on efficiency variances? Why is it important for Katharine Johnson to understand the causes of a variance before she evaluates performance?
Answer: It would not be wise to evaluate the performance of Michael Samson's Performance solely on the price variances. Efficiency variance is also very very important to consider, because since because of the poor quality of materials ordered from online store, Better Bikes now consume 2 lb extra per bicycle production, which over all increases the cost price of the bicycle. Had Katherine only judged on the basis of price variance, she would have chosen the online store option, because it was available $1 cheaper. Thats the reason Katherine should understand the causes of variance before evaluating performance.
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