Chapter 7, Problem 7.38P

Material-cost variances, use of variances for performance evaluation. Katharine Johnson is the owner of Best Bikes, a company that produces high-quality cross-country bicycles. Best Bikes participates in a supply chain that consists of suppliers, manufacturers, distributors, and elite bicycle shops. For several years Best Bikes has purchased titanium from suppliers in the supply chain. Best Bikes uses titanium for the bicycle frames because it is stronger and lighter than other metals and therefore increases the quality of the bicycle. Earlier this year, Best Bikes hired Michael Bentfield, a recent graduate from State University, as purchasing manager. Michael believed that he could reduce costs if he purchased titanium from an online marketplace at a lower price.

Best Bikes established the following standards based upon the company’s experience with previous suppliers. The standards are as follows:

Cost of titanium	$18 per pound
Titanium used per bicycle	8 lbs.

Actual results for the first month using the online supplier of titanium are as follows:

Bicycles produced	400
Titanium purchased	5,200 lb. for $88,400
Titanium used in production	4,700 lb.

1. 1. Compute the direct materials price and efficiency variances.

Required

1. 2. What factors can explain the variances identified in requirement 1? Could any other variances be affected?
2. 3. Was switching suppliers a good idea for Best Bikes? Explain why or why not.
3. 4. Should Michael Bentfield’s performance evaluation be based solely on price variances? Should the production manager’s evaluation be based solely on efficiency variances? Why is it important for Katharine Johnson to understand the causes of a variance before she evaluates performance?
4. 5. Other than performance evaluation what reasons are there for calculating variances?
5. 6. What future problems could result from Best Bikes’ decision to buy a lower quality of titanium from the online marketplace?