Question

Molly Swift is the owner of Swift Bikes, a company that produces high-quality cross-country bicycles. Swift Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite bicycle shops. For several years, Swift has purchased titanium from an established set of suppliers in the supply chain. Swift uses titanium for the bicycle frames because it is stronger and lighter than other metals and therefore increases the quality of the bicycle. Earlier this year, Molly hired Alan Morrison, a recent graduate from WSU, as purchasing manager. Alan believed that he could reduce costs if he purchased titanium from an online marketplace at a lower price.

Swift established the following standards based on the company’s experience with previous suppliers. The standards are as follows:

Cost of titanium	$ 14 per pound
Titanium used per bicycle	8 pounds

Actual results for the first month using the online supplier of titanium are:

Bicycles produced	950
Titanium purchased	8,800 pounds for $ 114,400
Titanium used in production	8,800 pounds

1. Calculate the direct materials price and quantity (efficiency) variances. Was switching suppliers a good idea for Swift Bikes? Explain why or why not.
2. What factors can explain the variances identified in question 1? Could any other variances be affected?
3. For each of the following, limit your response to no more than 2 to 3 sentences for each sub-question.a) Should Alan’s (the purchasing manager) performance evaluation be based solely on price variances?  b) Should the production manager’s evaluation be based solely on efficiency variances? c) Why is it important for Molly Swift to understand the causes of a variance before she evaluates performance?  

Answer 1

	Evaluation of Variences:-
		950 Bicycles			950 Bicycles
	Particulars	SQ	SP	SQ X SP	AQ	AP	AQ X AP	AQ X SP
		7600	14	106400	8800	13	114400	123200
		(950*8)
	Total	7600		106400	8800	13	114400	123200
	Direct Material price Varience :- AQXSP-AQXAP					8800	(Favourable Varience)
	Direct Material Quantity Effiency Varience:-	Standard Quantity (-) Actual Quantity				-1200	(Adverse Varience)
	Was Switching Suppliers Good Idea:
	Since the standard price per titanium is $14 per pound where as the actual price per pound is $13 per pound .
	Further Established suppliers often resist to reduce price other than standard price as agreed even though competitors offer at lower price.
	Hence it is suggested to purchase titanium online so that it can be available at lower cost.
	Factors that could explain variences are	Price	Quantity of Titanium Used
	Should Alan purchsing policy be dependent solely on price variences:
	Absoluetly not as the product in first instance should also include quantity as the parameter the customer thinks of first.
	Should production manager evaluation be solely dependent on efficiency:
	Yes the production manager evaluation be dependent on efficiency as unlike purchase manager he is concerned with units produced on standard terms.
	Why is it important for Molly Swift to understand the causes of a variance before she evaluates performance?
	It is important because price varience enables to determine the purchase policy of company.
	Efficiency Varience to determine the materials to be used by the entity to reduce material quantity varience.