RCC has recently had problems with the quality and the timeliness of deliveries. When a supplier delivers a load to RCC, it goes through an initial inspection to assure it meets specification. If the load fails the initial inspection, it goes through a secondary inspection to determine the exact issue. Almost always, the issue can be resolved and the load can be used. The initial inspection costs $3,000 per load. A secondary inspection, which is more thorough, costs $150 per load. If a delivery is delayed, RCC has to hire temporary workers or pay overtime to some employees. The average cost of a delayed load is $4,000. The following are summary statistics from last year's purchases from the two suppliers. Toorak Gravel Kilda Corp. Number of loads 100 400 Average tons per load 10,000 5,000 Average price per ton $ 6.00 $ 5.90 Number of initial inspections passed 94 300 Number of delayed deliveries 10 80 The sales manager of Kilda Corporation has proposed to the purchasing manager at RCC that KC be given an exclusive contract to supply the aggregate. Assume that the total annual demand remains the same. If it receives the contract, KC will deliver the aggregate in the same average-sized load as it does currently. Required: a. If KC receives the exclusive contract, assume the load quality and delivery timeliness will remain the same as current experience. What is the maximum price RCC should offer KC for the exclusive contract? (Round your intermediate calculations and final answer to 2 decimal places.) b. Suppose KC guarantees that no deliveries will be delayed or it will repay RCC for the costs associated with the delays. What is the maximum price RCC should offer KC for the exclusive contract? (Round your intermediate calculations and final answer to 2 decimal places.)
Problem 10-63 (Algo) Activity-Based Costing of Suppliers (LO 10-3, 4)
Roscoe Construction Company (RCC) is a company specializing in building roads and highways. As a part of its business, it receives supplies of aggregate from two suppliers: Toorak Gravel (TG) and Kilda Corporation (KC). RCC purchasing has expressed a preference for KC based on price, but occasionally has to order from TG when KC cannot fill the order.
RCC has recently had problems with the quality and the timeliness of deliveries. When a supplier delivers a load to RCC, it goes through an initial inspection to assure it meets specification. If the load fails the initial inspection, it goes through a secondary inspection to determine the exact issue. Almost always, the issue can be resolved and the load can be used. The initial inspection costs $3,000 per load. A secondary inspection, which is more thorough, costs $150 per load. If a delivery is delayed, RCC has to hire temporary workers or pay overtime to some employees. The average cost of a delayed load is $4,000.
The following are summary statistics from last year's purchases from the two suppliers.
| Toorak Gravel |
Kilda Corp. |
|||||
| Number of loads | 100 | 400 | ||||
| Average tons per load | 10,000 | 5,000 | ||||
| Average price per ton | $ | 6.00 | $ | 5.90 | ||
| Number of initial inspections passed | 94 | 300 | ||||
| Number of delayed deliveries | 10 | 80 | ||||
The sales manager of Kilda Corporation has proposed to the purchasing manager at RCC that KC be given an exclusive contract to supply the aggregate. Assume that the total annual demand remains the same. If it receives the contract, KC will deliver the aggregate in the same average-sized load as it does currently.
Required:
a. If KC receives the exclusive contract, assume the load quality and delivery timeliness will remain the same as current experience. What is the maximum price RCC should offer KC for the exclusive contract? (Round your intermediate calculations and final answer to 2 decimal places.)
b. Suppose KC guarantees that no deliveries will be delayed or it will repay RCC for the costs associated with the delays. What is the maximum price RCC should offer KC for the exclusive contract? (Round your intermediate calculations and final answer to 2 decimal places.)
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