Fundamentals of Managerial Accounting-Honors
Instructor – Will O’Hara (copyright 2009 © John Wiley & Sons) Thursday, January 19, 2012
Chapter 2 – Indentifying and Estimating Costs and Benefits
|2.45 |Controllability and relevance (LO1). Rams Ramachandran is considering the wisdom of reducing the number of suppliers | | |his firm uses. Currently, Rams uses 25 suppliers to purchase goods worth $2,500,000 per year. To manage the orders and | | |coordinate with suppliers, Rams employs one manager and two clerical staff. The manager earns $65,000 per year and each| | |clerical staff person earns $35,000 per year. (As VP, Rams earns $175,000 annually.) Reducing the number of suppliers | | |from 25 to 6 would allow Rams' firm to free up one of the clerical staff. While the manager would supervise fewer | | |people, she also would interact more with each supplier; thus, her workload would not change appreciably. | | | | | |Rams bargains aggressively with suppliers, and, with 25 suppliers, he was anticipating a 3% savings in purchase costs | | |next year. With only six suppliers, however, each supplier would have greater bargaining power, eliminating Rams' | | |ability to reduce the prices paid for goods. Finally, Rams believes that better coordination with fewer suppliers would| | |increase service quality (e.g., a lower risk of stock outs and other problems), and he estimates the cost savings at | | |$100,000 per year. | | | | | |Required: | | |[pic] | | |a. | | |Classify the following costs as to their controllability and relevance for Rams' decision: (1) Cost of goods purchased;| | |(2) Clerical staff salaries; (3) Manager's salary; (4) Service quality cost savings; and (5) Rams' salary. | | | | | |[pic] | | | | | |b. | | |Should Rams use 25 or 6 suppliers? | | | | | |a) | | |i. Cost of good purchased – controllable and relevant because the 25 supplier option will allow for 3% reduction in | | |purchase cost whereas the 6 supplier option will not result in a reduction to purchase cost. The difference is $75000 | | |in favor of the 25 supplier option. | | |ii. Clerical staff salaries – controllable and relevant – with the 6 supplier option Ram will be...