Maderazo, Dheine Louise L.

A1C

5-43. Activity-based Supplier Costing

1. Cost per component for each supplier

Manzer Inc. Buckner Company Total hours

Sampling hours 80 3,920 4,000
Rework hours 360 5,640 6,000
Warranty hours 800 15,200 16,000

Total hours = Manzer Inc. + Bucker company

Activity Cost Hours per activity Cost per hour

Inspecting component $ 480,000 4,000 $120
Reworking products 6,084,000 6,000 1,014
Warranty work 9,600,000 16,000 600

*Cost per hour = Activity cost/hours per activity

Manzer Inc. Buckner Company

Purchase cost:
$89 x 800,000 $71,200,000
$86 x 3,200,000 $275,200,000
Inspecting components:
$120 x 80 9,600
$120 x 3,920 470,400
Reworking products:
$1,014 x 360 365,040
$1,014 x 5,640 5,718,960
Warranty work:
$600 x 800 480,000
$600 x 15,200 9,120,000
Total costs 72,054,640 290,509,360
Units 800,000 3,200,000
Unit cost (Total costs/No. of Units) $90.07 $90.78
 2. Cost of lost sales to each supplier and the change in cost of each supplier’s component.

Loss $4,000,000
Warranty hours 16,000

Cost of sales per warranty hour $250

Manzer Inc. Buckner Company

Lost sales:
$250 x 800 $200,000
$250 x 15,200 $3,800,000
200,000 3,800,000
Units purchased 800,000 3,200,000
Add: Change in cost $0.25 $1.19

3. Conceptual connection
Accurate assignment of cost to cost objects is important in order to make well-grounded
decisions for the company. Suppliers can bring about costly activities for the company to perform
such as inspection, rework and warranty works. Thus, the purchase price of the product is more
than the cost of its components. In the given example, the product with a higher component costs is
actually the one which is cheaper, because it has a lesser demand on internal activities. With this,
the company would purchase fewer products from the other supplier and also try to work with the
supplier where the significant demands affect the internal activities to test if the quality of the
component can be increased.

5-44. Nonvalue-Added Costs

a. (12 *0.5 + 8*10) – (8*0.25 + 7.5*10) = 86 – 77 = $9/unit
b. 8*75%*50 = $300/gear
c. 6*20 = $120/unit
d. (16,000*5) + 32,000 = $400,000/year
e. (6.5-6) * 500 = $250/unit
f. $900,000/year

5-45. Driver Analysis

Root cause
a. Process design
b. Product design
c. Manufacturing layout
d. Process design, product design, quality approach
e. Suppliers
f. Product design

5.46 Type of Activity Management

Cost reduction
a. Activity Reduction
b. Activity Reduction
c. Activity Elimination
d. Activity Elimination
e. Activity Selection
f. Activity Sharing