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KANSAS CORPORATION ....manufactures medical equipment. They produce all the components necessary for the production of one of its products except for one. This component is purchased from two local suppliers: Supplier A and Supplier Supplier A sells the component for $192 per unit, while Supplier B sells the same component for $172. Because of the lower price, the company purchases 80 percent of its components from Supplier B. They purchase the remaining 20 percent from Supplier A to ensure an alternative source. The total annual demand is 1,500,000 components. Supplier A's sales manager is pushing the company to purchase more of its units, arguing that its component is of much higher quality and so should prove to be less costly than Supplier B's lower-quality component. Supplier A has sufficient capacity to supply all the components needed and is asking for a long-term contract. With a five-year contract for 1,200,000 or more units, Supplier A will sell the component for $180 per unit with a contractual provision for an annual product- specific inflationary adjustment. s n gish (United States The purchasing manager is intrigued by the offer and wonders if the higher-quality component actually does cost less than the lower-quality Supplier B component. To help assess the cost effect of the two components, the following data were collected for quality-related activities and suppliers: Activity data Inspecting components (sampling only) Expediting work due to late delivery Reworking products due to failed components Warranty work due to failed components $1,800,000 $1,440,000 $10,266,750 $32,400,000 Supplier Supplier data: Supplier B $192 300,000 15 Unit purchase price Units purchased Expediting orders Sampling hours* Rework hours Warranty hours 30 $172 1,200,000 135 1,470 2,115 5,700 135 300 *The quality control department indicates that the sampling inspections for Supplier A has been reduced because the reject rate is so low. *The Quality Control Department indicates that sampling inspection for the Supplier A component has been reduced because the reject rate is so low. Required: 1. Calculate the cost per component for each supplier, taking to consideration the costs of the quality- related activities and using the current prices and sales volume. Given this information, what do you think the purchasing manager ought to do? Explain. 2. Suppose the Quality Control Department estimates that the company loses a total of $6,750,000 in sales per year because of the reputation effect of defective units attributable to failed components: a) What information would you like to have to assign this cost to each supplier? b) Suppose that you had to assign the cost of lost sales to each supplier using one of the drivers already listed. Which driver would you chooso? c) Using this driver, assign the quality-related costs to each supplier. e the change in the cost of the Supplier A component and Supplier B component attributable to lost sales. What are the new unit costs

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