Stella McDonald Is a Purchasing Agent for a Motorcycle Manufacturer

Essay

Stella McDonald is a purchasing agent for a motorcycle manufacturer. Stella is evaluating two potential suppliers of seats for the company's motorcycles. One supplier (A) quotes a price of $165 per seat and assures 100% quality and delivery standards. The second supplier (B) quotes a price of $135 per seat but does not give any written assurances on quality or delivery. McDonald is not sure which supplier should be awarded the contract.
Assume you are the management accountant for the motorcycle manufacturer. McDonald asks you to prepare an estimate of the related costs of buying the seats from supplier B. She tells you that the estimate is needed because unless dollar estimates are attached to nonfinancial factors, such as lost production costs, her supervisor will not give it full attention. McDonald provides you with the following information:
∙ Production output is 2,000 motorcycles per year based on 250 production days a year.
∙ Production time per day is 8 hours at a cost of $4,000 per hour to run the production line.
∙ Lost production time due to poor quality is 1%.
∙ Satisfied customers purchase, on average, three motorcycles during a lifetime.
∙ Satisfied customers recommend the product, on average, to 5 other people.
∙ Marketing estimates that using the seat from supplier B will result in 5 lost customers per year from repeat business and referrals.
∙ Average contribution margin per motorcycle is $5,000.
Required:
Estimate the costs of buying motorcycle seats from supplier B. (Note: This problem requires you to think creatively and make reasonable estimates; therefore, there is more than one correct answer.)