HD Hogg Motorcycle Company manufactures a variety of motorcycles. Hogg’s purchasingpolicy requires that the purchasing agents place each quarter’s purchasing requirementsout for bid. This is because the Purchasing Department is evaluated solely by its abilityto get the lowest purchase prices. The lowest cost bidder receives the order for the nextquarter (90 days). To make its motorcycles, Hogg requires 4,500 frames per quarter. Hoggreceived two frame bids for the third quarter, as follows:• Famous Frames, Inc.: $301 per frame. Delivery schedule: 50 frames per working day(90 days in the quarter).• Iron Horse Frames Inc.: $300 per frame. Delivery schedule: 4,500 (50 frames × 90 days)frames at the beginning of July to last for three months.Hogg accepted Iron Horse Frames Inc.’s bid because it was the low-cost bid. Instructions1. Comment on Hogg’s purchasing policy.2. What are the additional (hidden) costs, beyond price, of Iron Horse FramesInc.’s bid? Why weren’t these costs considered?3. Considering just inventory financing costs, what is the additional cost per frame of Iron Horse Frames Inc.’s bid if the annual cost of money is 12%? (Hint: Determine the average value of frame inventory held for the quarter and multiply by the quarterlyinterest charge, then divide by the number of frames.)
HD Hogg Motorcycle Company manufactures a variety of motorcycles. Hogg’s purchasing
policy requires that the purchasing agents place each quarter’s purchasing requirements
out for bid. This is because the Purchasing Department is evaluated solely by its ability
to get the lowest purchase prices. The lowest cost bidder receives the order for the next
quarter (90 days). To make its motorcycles, Hogg requires 4,500 frames per quarter. Hogg
received two frame bids for the third quarter, as follows:
• Famous Frames, Inc.: $301 per frame. Delivery schedule: 50 frames per working day
(90 days in the quarter).
• Iron Horse Frames Inc.: $300 per frame. Delivery schedule: 4,500 (50 frames × 90 days)
frames at the beginning of July to last for three months.
Hogg accepted Iron Horse Frames Inc.’s bid because it was the low-cost bid.
Instructions
1. Comment on Hogg’s purchasing policy.
2. What are the additional (hidden) costs, beyond price, of Iron Horse Frames
Inc.’s bid? Why weren’t these costs considered?
3. Considering just inventory financing costs, what is the additional cost per frame of Iron Horse Frames Inc.’s bid if the annual cost of money is 12%? (Hint: Determine the average value of frame inventory held for the quarter and multiply by the quarterly
interest charge, then divide by the number of frames.)
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