Textbook Problem

Lean principles

J. Burns Motorcycle Company manufactures a variety of motorcycles. J. Burns’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 days). To make its motorcycles, J. Burns requires 3,600 frames per quarter. J. Burns received two frame bids for the third quarter, as follows:

• Midnight Frames, Inc.: $401 per frame. Delivery schedule: 40 frames per working day (90 days in the quarter).
• Iron Fist Frames Inc.: $400 per frame. Delivery schedule: 3,600 (40 frames x 90 days) frames at the beginning of July to last for three months.

J. Burns accepted Iron Fist Frames Inc.’s bid because it was the low-cost bid.

Instructions

1. 1. Comment on J. Burns’s purchasing policy.
2. 2. What are the additional (hidden) costs, beyond price, of Iron Fist Frames Inc.’s bid? Why weren’t these costs considered?
3. 3. Considering only inventory financing costs, what is the additional cost per frame of Iron Fist Frames Inc.’s bid if the annual cost of money is 8%? (Hint: Determine the average value of frame inventory held for the quarter and multiply by the quarterly interest charge, then divide by the number of frames.)