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 Activity Cost Inspecting components (sampling only) $480,000 Reworking products (due to failed component) 6,084,000 Warranty work (due to failed component) 9,600,000
II. Supplier Data
Mazner Inc. Buckner Company
Unit purchase price $89 $86
Units purchased 800,000 3,200,000
Sampling hours* 80 3,920
Rework hours 360 5,640
Warranty hours 800 15,200
(*)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.
2a. Suppose that Bowman loses $4,000,000 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?
3. Based on the analysis in Requirements 1 and 2, discuss the importance of activity-based supplier costing for internal decision making.