Comet Motorcycle Company manufactures a variety of motorcycles. Comet’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, Comet requires 5,400 frames per quarter. Comet received two frame bids for the third quarter, as follows:

• Famous Frames, Inc.: $322 per frame. Delivery schedule: 60 frames per working day (90 days in the quarter).

• Iron Horse Frames Inc.: $320 per frame. Delivery schedule: 5,400 (60 frames × 90 days) frames at the beginning of July to last for three months.

Comet accepted Iron Horse Frames Inc.’s bid because it was the low-cost bid.

Instructions

1. Comment on Comet’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 cost of money is 10%?