Katharine Rouse is the owner of Groovy Bikes, a company that produces high- quality cross- country bicycles. Groovy Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite bicycle shops. For several years Groovy Bikes has purchased titanium from suppliers in the supply chain. Groovy Bikes uses titanium for the bicycle frames because it is stronger and lighter than other metals and therefore increases the quality of the bicycle. Earlier this year, Groovy Bikes hired Michael Anderson, a recent graduate from State University, as purchasing manager. Michael believed that he could reduce costs if he purchased titanium from an online marketplace at a lower price. Groovy Bikes established the following standards based on the company’s experience with previous sup-pliers. The standards are as follows:

Cost of titanium ........$ 17 per pound

Titanium used per bicycle .......... 8 lbs.

Actual results for the first month using the online supplier of titanium are:

Bicycles produced .........300

Titanium purchased .........3,400 lbs. for $ 54,400

Titanium used in production ......2,900 lbs.

Required

1. Compute the direct materials price and efficiency variances.

2. What factors can explain the variances identified in requirement 1? Could any other variances be affected?

3. Was switching suppliers a good idea for Groovy Bikes? Explain why or why not.

4. Should Michael Anderson’s performance evaluation be based solely on price variances? Should the production manager’s evaluation be based solely on efficiency variances? Why is it important for Katharine Rouse to understand the causes of a variance before she evaluates performance?

5. Other than performance evaluation, what reasons are there for calculating variances?

6. What future problems could result if Groovy Bikes purchased lower- quality titanium from the online marketplace?