Chapter 10, Problem 60P

Activity-Based Costing of Suppliers

JFI Foods produces processed foods. Its basic ingredient is a feedstock that is mixed with other ingredients to produce the final packaged product. JFI purchases the feedstock from two suppliers, Rex Materials and Red Oak Chemicals. The quality of the final product depends directly on the quality of the feedstock. If the feedstock is not correct, JFI has to dispose of the entire batch. All feedstock in this business is occasionally “bad.” so JFI measures what it calls the “yield,” which is measured as

Yield = Good output ÷ Input

where the output and inputs are both measured in tons. As a benchmark. JFI expects to get 8 tons of good output for every 10 tons of feedstock purchased for a yield of 80 percent (= 8 tons of output ÷ 10 tons of feedstock).

Data on the two suppliers for the past year follow:

Required

Assume that the average quality, measured by the yield, and prices from the two companies will continue as in the past. What is the effective price for feedstock from the two companies when quality is considered?