Problem regarding the activity-based supplier costing

Reference no: EM13983220

Activity-Based Supplier Costing

Seabrook Company manufactures heating systems. Seabrook purchases all the part necessary for its product except for one electronic component, which is purchased from two local suppliers: Wood Inc. and Forest Company. Both suppliers are reliable and seldom deliver late; however, Wood sells the component for $48 per unit, while Forest sells the same component for $43. Seabrook purchases 80 percent of its component from Forest 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 collected 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.	Forest 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 Seabrook 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?

Reference no: EM13983220

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