Cebo Zikode started Formula Trucks Inc in 1999 and is famous in the racing business and has worked with many different suppliers. Formula Trucks Inc. manufactures high quality trucks, purchases and installs engines from its    two suppliers: Aces Engines and Sonwat Company. The Aces engine has a   price of $1,000. The Sonwat engine is $900 per unit.

Formula produces and sells 22,000 racing trucks. Of the 22,000 engines    needed for the racing trucks, 4,000 are purchased from Aces Engines, and 18,000 are purchased from the Sonwat Company. Sometimes engines can be delayed and Formula can receive them late.

These are suppliers explanations of delays and extra costs that are experienced when making the engines :

Truck Engines Replacement –they test all units after assembly and some are rejected because failure of the engine. The engines have to be replaced with the supplier replacing any failed truck engines. When engines fail it can        make other parts fail and also need to be replaced. The cost is $800,000      for the truck engines replacement .

Speed up the Orders- This happens when there is late/failed delivery of truck engines and costs $1,000,000

Truck Engine Repairs- Usually also due to engine failure, this is for repair work under warranty. Repair means replacing engine which is costly. Other costs are transportation, labour which is expensive and costs $1,800,000 .

The following activity cost and supplier data have been collected by the suppliers and given to Cebo at Formula Trucks:

ACES has the following activity costs: Warranty Repairs by source is 2,440, Engines to be replaced by source is 1,980, Failed and late shipments is 198 .

SONWAT has the following activity costs: Warranty Repairs by source is 60, Engines to be replaced by source is 20, Failed and late shipments is 2 .

The production manager, Michael Leung says he prefers the Aces engine.   However, JK Bath, purchasing manager, maintains that the price difference is too great to buy more than the 4,000 units currently purchased. JK also wants to maintain a significant connection with the Aces source just in case the less expensive source cannot supply the needed quantities. Michael, however, is convinced that the quality of the Aces engine is worth the price difference. Maade Yulpina, the controller, working with you has decided to use activity costing to resolve the issue.

1. Find the Numbers: Find what is the activity based supplier cost per engine (supplier related activity costs plus acquisition cost) and show which of the two suppliers is the low cost supplier? Explain why this is a better measure of engine costs than the usual purchase cost assigned to the engines? (6 marks)
2. Analyze the Numbers: Play the role of a managerial accountant consultant and explain what the numbers really mean for their organization. (3 marks)
3. Creative Consulting: Use your creativity to analyze the problem and come up with various solutions for the organization going forward. (ie. How to increase profits, client satisfaction, make processes more efficient, people/staff happier, provide create short, mid-term and long term strategy).   (3 marks)

Answer rating: 100% (QA)

Aces Engines Sonwat Company Total Price per engine 1000 900 Units of engines purchased 4000 18000 22000 Activity Cost Drivers Engines replaced 1980 20 ... View the full answer