Ready-Light Co. manufactures light bulbs. Ready-Light’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 working days).
To make its bulb products, Ready-Light requires 36,000 pounds of glass per quarter.
Ready-Light received two glass bids for the third quarter, as follows:
• Mid-States Glass Company: $25.00 per pound of glass. Delivery schedule: 36,000 (400 lbs. × 90 days) pounds at the beginning of July to last for 3 months.
• Akron Glass Company: $25.15 per pound of glass. Delivery schedule: 400 pounds per working day (90 days in the quarter).
Ready-Light accepted Mid-States Glass Company’s bid because it was the low-cost bid.
Instructions
1. Comment on Ready-Light’s purchasing policy.
2. What are the additional (hidden) costs, beyond price, of Mid-States Glass Company’s bid? Why weren’t these costs considered?
3. Considering just inventory financing costs, what is the additional cost per pound of
Mid-States Glass Company’s bid if the cost of money is 8%?