Figure 7-3.Hamilton Company manufactures engines. Hamilton produces all the parts necessary for its engines except for one electronic component, which is purchased from two local suppliers: Traynor Inc. and Bello Company. Both suppliers are reliable and rarely deliver late; however, Traynor sells the component for $10.00 per unit and Bello sells the same component for $8.95. Hamilton purchases 70% of its components from Bello, because of the lower price. The total annual demand is 75,000 units.
-Refer to Figure 7-3. Suppose that Hamilton loses $2,500,000 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 Traynor Inc. Then determine what effect this would have on the cost per component.
A) $4.00 per unit
B) $25.00 per unit
C) $8.95 per unit
D) $8.15 per unit

Question

Figure 7-3.Hamilton Company manufactures engines. Hamilton produces all the parts necessary for its engines except for one electronic component, which is purchased from two local suppliers: Traynor Inc. and Bello Company. Both suppliers are reliable and rarely deliver late; however, Traynor sells the component for $10.00 per unit and Bello sells the same component for $8.95. Hamilton purchases 70% of its components from Bello, because of the lower price. The total annual demand is 75,000 units.  
-Refer to Figure 7-3. Suppose that Hamilton loses $2,500,000 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 Traynor Inc. Then determine what effect this would have on the cost per component.
A) $4.00 per unit 
B) $25.00 per unit 
C) $8.95 per unit 
D) $8.15 per unit

Quizplus · Accepted Answer

To assign the proportional cost of lost sales to Traynor Inc., we need to calculate the percentage of faulty components that were supplied by Traynor.

Hamilton purchases 70% of its components from Bello, which means they purchase 30% from Traynor.

If Hamilton has an annual demand of 75,000 units, then they purchased 22,500 units from Traynor and 52,500 units from Bello.

Suppose that Hamilton loses $2,500,000 in sales per year due to faulty components.

To calculate the cost per component, we need to divide the total cost by the total number of components.

Total cost = $2,500,000 
Total number of components = 75,000

Cost per component = $2,500,000 / 75,000 = $33.33

So each component costs Hamilton $33.33 in lost sales.

To assign the proportional cost to Traynor, we need to calculate what percentage of the faulty components were supplied by Traynor.

Let's assume that Traynor supplied x% of the faulty components.

Bello supplied 100% - x% of the faulty components.

We know that Hamilton purchased 30% of the components from Traynor, so:

0.30x = the number of faulty components supplied by Traynor.

We can then calculate the cost of the faulty components supplied by Traynor:

Cost of faulty components supplied by Traynor = 0.30x * $33.33

We know that overall, Hamilton lost $2,500,000 in sales due to faulty components.

Therefore:

Cost of faulty components supplied by Bello = (100% - x%) * $2,500,000

Now we can set up an equation to solve for x:

0.30x * $33.33 = $2,500,000 * (1 - x)

x = 0.1166 or 11.66%

So Traynor supplied 11.66% of the faulty components.

To assign the proportional cost to Traynor, we need to multiply their percentage of faulty components by the total cost per component:

Proportional cost of lost sales for Traynor = 11.66% * $33.33 = $3.89

Since Traynor sells their component for $10.00 and the proportional cost of lost sales is $3.89, the new cost per component if the proportional cost was assigned to Traynor would be:

$10.00 + $3.89 = $13.89

But Hamilton purchases 70% of its components from Bello and only 30% from Traynor, so we need to adjust the cost per component accordingly:

New cost per component = (0.70 * $8.95) + (0.30 * $13.89) = $8.15

Therefore, the answer is D.