In: Accounting
Fame Company manufactures engines. Fame produces all the parts
necessary for its engines, except for one electronic component,
which is purchased from two local suppliers: Hydra International
and Parable Company. Both suppliers are reliable and rarely deliver
late. Hydra sells the component for $12.00 per unit, while Parable
sells the same component for $10.00. Fame purchases 80% of its
components from Parable because of the lower price it offers. The
total annual demand is 95,000 units.
I. Activity Data | |
Activity Cost | |
Inspecting components (sampling only) | $ 210,000 |
Reworking products (due to failed component) | $2,454,000 |
Warranty work (due to failed component) | $1,923,000 |
II. Supplier Data | ||
Hydra | Parable | |
International | Company | |
Unit purchase price | $12.00 | $10.00 |
Units purchased | 19,000 | 76,000 |
Sampling hours | 60 | 2,600 |
Rework hours | 150 | 3,800 |
Warranty hours | 550 | 7,000 |
Suppose that Fame loses $3,500,000 in sales per year because of its
reputation for defective units attributable to failed components.
Using warranty hours, assign the proportional cost of lost sales to
Hydra International. What is the increase in the cost per
component? (Note: Round the lost sales per warranty hour and the
cost of the component to two decimal places.)
a.$13.42 per unit
b.$8.95 per unit
c.$25.72 per unit
d.$4.65 per unit