Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 16

Supply Chain and Supply Chain Costs

Pine Ridge Cabinets (PRC) produces cabinets for new home builders. You have been called in to settle a dispute between PRC and Eastern Homes, a builder of custom homes.

Eastern Homes buys 10,000 units of a particular cabinet from PRC every year. It insists that PRC keep a one-month inventory to accommodate fluctuations in Eastern’s demand. PRC does not want to keep any inventory and says that Eastern Homes should buy components in advance and store them.

You determine that the inventory storage costs per unit are $100 at PRC and $200 at Eastern Homes.

Required

How do you suggest the two companies settle their dispute?