Question

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Kinnear Plastics manufactures various components for the aircraft and marine industry. Kinnear buys plastic from two vendors: Tappan Corporation and Hill Enterprises. Kinnear chooses the vendor based on price. Once the plastic is received, it is inspected to ensure that it is suitable for production. Plastic that is deemed unsuitable is disposed of.

The controller at Kinnear collected the following information on purchases for the past year:

	Tappan	Hill
Total purchases (tons)	5,000	8,000
Plastic discarded	120	480

The purchasing manager has just received bids on an order for 180 tons of plastic from both Tappan and Hill. Tappan bid $1,464 and Hill bid $1,457 per ton.

Required:

1-a. Assume that the average quality, measured by the amounts discarded from the two companies, will continue as in the past. What is the effective cost per ton for both Tappan and Hill? (Do not round intermediate calculations.)

   Tappan    Hill

Effective cost per ton

1-b. Which supplier would you recommend that the purchasing manager select?

Tappan

or

• Hill

Answer 1

1-a. Assume that the average quality, measured by the amounts discarded from the two companies, will continue as in the past. What is the effective cost per ton for both Tappan and Hill?

	Tappan	Hill
Tons purchased	5000	8000
Tons discarded	120	480
Percentage of discarded product	(120/5000) * 100 =2.4%	(480/8000) * 100 =6%
Quoted price	$1464	$1457
Effective cost per ton (a)	$1500	$1550

(a) Tappan = $1500 = $1464 ÷ (100% – 2.4%)

        Hill = $1550 = $1457 ÷ (100% – 6%)

1-b. Which supplier would you recommend that the purchasing manager select?

Tappan due to low effective cost