ACTIVITY-BASED SUPPLIER COSTING
Hepworth Company manufactures heating systems. Hepworth produces all the parts necessary for its product except for one electronic component, which is purchased from two local suppliers: Wood Inc. and Hardy Company. Both suppliers are reliable and seldom deliver late; however, Wood sells the component for $48 per unit, while Hardy sells the same component for $43. Hepworth purchases 80 percent of its components from Hardy because of its lower price. The total annual demand is 2,000,000 components.
To help assess the cost effect of the two components, the following data were col- lected for supplier-related activities and suppliers:
I. Activity Data
|
|
Activity Cost ($)
|
|
Inspecting components (sampling only)
|
240,000
|
|
Reworking products (due to failed component)
|
3,042,000
|
|
Warranty work (due to failed component)
|
4,800,000
|
II. Supplier Data
|
Wood Inc. |
Hardy Company |
|
Unit purchase price
|
$48
|
$43
|
|
Units purchased
|
400,000
|
1,600,000
|
|
Sampling hours*
|
40
|
1,960
|
|
Rework hours
|
180
|
2,820
|
|
Warranty hours
|
400
|
7,600
|
* Sampling inspection for Wood'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. Round the unit cost to two decimal places.
2. Suppose that Hepworth loses $2,000,000 in sales per year because of the reputation effect of defective units attributable to failed components. Using warranty hours, assign the cost of lost sales to each supplier. By how much would this change the cost of each supplier's component?