Question

External Linkages, Activity-Based Supplier Costing Jackson, Inc., manufactures motorcycles. Jackson produces all the components necessary for the production of the cycles except for one (a carburetor). This component is purchased from two local suppliers: Harvey Parts and Curtis, Inc. Harvey sells the component for $67 per unit, while Curtis sells the same component for $61. Because of the lower price, Jackson purchases 75 percent of its components from Curtis. Jackson purchases the remaining 25 percent from Harvey to ensure an alternative source. The total annual demand is 196,000 carburetors. Harvey's sales manager is pushing Jackson to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Curtis's lower-quality component. Harvey has sufficient capacity to supply all the carburetors needed and is asking for a long-term contract. With a five-year contract for 147,000 or more units, Harvey will sell the component for $63 per unit with a contractual provision for an annual product-specific inflationary adjustment. Jackson's purchasing manager is intrigued by the offer and wonders if the higher quality carburetor actually does cost less than the lower-quality Curtis carburetor. To help assess the cost effect of the two products, the following data were collected for quality-related activities and suppliers: I. Activity data: Activity Cost Inspecting components (sampling only) $ 199,320 Expediting work (due to late delivery) 148,800 Reworking products (due to failed component) 984,400 Warranty work (due to failed component) 1,683,190 II. Supplier data: Harvey Curtis Unit purchase $67 $61 price Units purchased 49,000 147,000 Expediting orders 30 270 Sampling hours 100 4,430 Rework hours 300 4,300 Warranty hours 330 5,660 The Quality Control Department indicates that sampling inspection for the Harvey component has been reduced because the reject rate is so low.

Answer 1

Calculation of activity rates

Inspecting carburettors =$199,320/4,530 =$44 per sampling hour

Expediting work =$148,800/300=$496 per order

Reworking products =$984,400/4,600 =$214 per rework hour

Warranty work =$1,683,190/5,990=$281 per warranty hour

Cost per component

	Harvey	Curtis
Purchase cost	$3,283,000(49,000×$67)	$8,967,000(147,000×$61)
Inspecting components	$4,400(100×$44)	$194,920(4,430×$44)
Expediting work	$14,880(30×$496)	$133,920(270×$496)
Reworking products	$64,200(300×$214)	$920,200(4,300×$214)
Warranty work	$92,730(330×$281)	$1,590,460(5,660×$281)
Total supplier	$3,459,210	$11,806,500
Units suppled	49,000	147,000
Cost per units	$70,59	$80.31

2. To assign the cost of lost sales =$3,360390/5,990 =$561 per warranty hour

Lost sales  

Harvery =330×$561 =$185,130

Curtis = 5660×$561=$3,175,260

Warranty work should be the best driver for to allocate lost sales

Change in the unit cost of Curtis carburettor attributable to lost sales =$3,175,260/147,000 =$21.6

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