Refer to Decision Maker, Purchase Manager, in this chapter. Assume that you are the motorcycle manufacturer’s managerial accountant. The purchasing manager asks you about preparing an estimate of the related costs for buying motorcycle seats from supplier (B). She tells you this estimate is needed because unless dollar estimates are attached to nonfinancial factors such as lost production time, her supervisor will not give it full attention. The manager also shows you 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 $500 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 10 other people.
● Marketing predicts that using seat (B) will result in 8 lost customers per year from repeat business and referrals.
● Average gross profit per motorcycle is $4,000. Required Estimate the costs (including opportunity costs) of buying motorcycle seats from supplier (B). This problem requires that you think creatively and make reasonable estimates; thus there could be more than one correct answer. (Hint: Reread the answer to Decision Maker, and compare the cost savings for buying from supplier [B] to the sum of lost customer revenue from repeat business and referrals and the cost of lost production time.)