Activity-Based Supplier Costing Seabrook Company manufactures heating systems. S
ID: 2558031 • Letter: A
Question
Activity-Based Supplier Costing Seabrook Company manufactures heating systems. Seabrook produces all the parts 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 components 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 Inspecting components (sampling only) Reworking products (due to failed component) Warranty work (due to failed component) Activity Cost (S) 240,000 3,042,000 4,800,000 II. Supplier Data Wood Inc. Forest Company Unit purchase price Units purchased Sampling hours* Rework hours Warranty hours $48 400,000 40 180 400 S43 1,600,000 1,960 2,820 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 supplierelated activities and using the current prices and sales volume. Round the unit cost to two decimal places, Wood Inc. Forest Company 2a. 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 Wood Forest 2b. By how much would this change the cost of each supplier's component? Round your answers to the nearest cent. Wood Forest per unit per unit Select SelectExplanation / Answer
Answer
WOOD INC.
Purchase cost
[$48 x 400000]
19200000
Inspecting Cost
[$240000 x 40/2000]
4800
Rework Cost
[$3042000 x 180/3000]
182520
Warranty Work
[$4800000 x 400/8000]
240000
TOTAL Cost
19627320
Total Units purchased
400000
Wood Inc Cost per unit
$49.07
FOREST COMPANY
Purchase cost
[$43 x 1600000]
68800000
Inspecting Cost
[$240000 x 1960/2000]
235200
Rework Cost
[$3042000 x 2820/3000]
2859480
Warranty Work
[$4800000 x 7600/8000]
4560000
TOTAL Cost
76454680
Total Units purchased
1600000
Wood Inc Cost per unit
$47.78
Total Loss
$2000000
Attributable to Wood Inc
$100000
Attributable to Forest Company
$1900000
Wood Inc
Forest Company
Cost calculated earlier
19627320
76454680
Add: Attributed Losses
100000
1900000
Total
$19727320
$78354680
Units
400000
1600000
Cost per unit
$ 49.32
$ 48.97
Earlier Cost per unit
49.07
47.78
Change
$0.25
$1.19
Increased
Increased
WOOD INC.
Purchase cost
[$48 x 400000]
19200000
Inspecting Cost
[$240000 x 40/2000]
4800
Rework Cost
[$3042000 x 180/3000]
182520
Warranty Work
[$4800000 x 400/8000]
240000
TOTAL Cost
19627320
Total Units purchased
400000
Wood Inc Cost per unit
$49.07
FOREST COMPANY
Purchase cost
[$43 x 1600000]
68800000
Inspecting Cost
[$240000 x 1960/2000]
235200
Rework Cost
[$3042000 x 2820/3000]
2859480
Warranty Work
[$4800000 x 7600/8000]
4560000
TOTAL Cost
76454680
Total Units purchased
1600000
Wood Inc Cost per unit
$47.78
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