Cost Accounting (14th Edition)

JUST-IN-TIME PURCHASING 713
Exhibit 20-6
Annual Relevant Costs of Purchasing from Sontek and Denton
1
2
3
4
5
6
7
8
A B C D E F G H I J
Relevant Cost of Purchasing From
Sontek
Denton
Relevant Items
Relevant
Cost
Per Unit
Quantity
Per
Year
Total
Costs
Relevant
Cost
Per Unit
Quantity
Per
Year
(1)
(2)
(3)
(4) =
(2) × (3) (5)
(6)
(7) =
(5) × (6)
Purchasing costs
Ordering costs
$14.02
2.00
per unit
per
order
13,000
130
$ 182,260
260
$ 13.80
2.00
per unit
per order
13,000
130
$ 179,400
260
Inspection costs
0.05 per unit
0 0
0.05 per unit
13,000 650
Opportunity carrying costs 2.10 a per unit of average inventory 50 b 105
2.07 a per unit of average inventory 50 b
103
per year
per year
Other carrying costs (insurance,
materials handling, and so on)
3.10 per unit of average
inventory per year
50 b
155
per unit of average
inventory per year
9
10
11
12
Customer return costs
Stockout costs
Total annual relevant costs
10.00
4.00
per unit returned
per unit
0
150
0
600
$ 183,380
10.00
4.00
per unit returned
per unit
325 c
360
3,250
1,440
$ 185,253
13
14
15
16
17
Annual difference in favor of Sontek Purchasing cost per unit × 0.15 per year
b Order quantity ÷ 2 = 100 ÷ 2 = 50 units
2.5% of units returned × 13,000 units
$1,873
3.00
50 b
Total
Costs
150
What are the relevant total costs when choosing suppliers? Consider again CD
World. Denton Corporation, another supplier of disks, offers to supply all of CD World’s
compact disk needs at a price of $13.80 per package, less than Sontek’s price of $14.02,
under the same JIT delivery terms that Sontek offers. Denton proposes an Internet
purchase-order link identical to Sontek’s link, making CD World’s ordering cost $2 per
purchase order. CD World’s relevant cost of insurance, materials handling, breakage,
and the like would be $3.00 per package per year if it purchases from Denton, versus
$3.10 if it purchases from Sontek. Should CD World buy from Denton? To answer this,
we need to consider the relevant costs of quality and delivery performance.
CD World has used Sontek in the past and knows that Sontek will deliver quality
disks on time. In fact, CD World does not even inspect the compact disk packages that
Sontek supplies and therefore incurs zero inspection costs. Denton, however, does not
enjoy such a sterling reputation for quality. CD World anticipates the following negative
aspects of using Denton:
Inspection cost of $0.05 per package.
Average stockouts of 360 packages per year requiring rush orders at an additional
cost of $4 per package.
Product returns of 2.5% of all packages sold due to poor compact disk quality.
CD World estimates an additional cost of $10 to handle each returned package.
Exhibit 20-6 shows the relevant total costs of purchasing from Sontek and Denton. Even
though Denton is offering a lower price per package, there is a net cost savings of
$1,873 per year by purchasing disks from Sontek. Selling Sontek’s high-quality compact
disks also enhances CD World’s reputation and increases customer goodwill, which could
lead to higher sales and profitability in the future.
JIT Purchasing, Planning and Control, and Supply-Chain
Analysis
The levels of inventories held by retailers are influenced by the demand patterns of their
customers and supply relationships with their distributors and manufacturers, the suppliers
to their manufacturers, and so on. The supply chain describes the flow of goods,