QUESTION 1 Arena Company uses a traditional activity-based costing system to manage the relationships with its suppliers. It estimates that the time purchasing and logistics staff spend dealing with suppliers and

the theoretical capacity for different cost drivers are as follows: ACTIVITY Placing orders Quality inspection for incoming orders supplier Evaluation performance of TIME PERCENTAGE 60% 20% 20% of £ 3.00 SUPPLIER A ESTIMATED COST DRIVER QUANTITY (THEORETICAL CAPACITY) 8,000 orders 2,500 inspections 100% The total cost of purchasing and logistics activities is £200,000. For the two largest suppliers, Arena Company holds the following information. 40 evaluations SUPPLIER B £ 5.00 Average price purchased goods (per unit) Orders placed 1,000 Quality inspections 400 Performance evaluations 1 During the accounting period under consideration, Arena Company has purchased 10,000 units from supplier A and 6,000 units from supplier B. 500 200 1/nRequired: a) Assuming that the purchasing and logistics function operates at full capacity, use the information above to calculate the total cost of ownership (TCO) per unit for the two suppliers. (15 Marks) b) Calculate the supplier performance index (SPI) for the two suppliers. Page 2 of 5 (5 Marks) PTO BMAN21040 c) How can Arena Company use the SPI to manage the relationship with the two suppliers? (5 Marks) d) Give some examples of other performance indicators that can be used to evaluate the performance of suppliers and describe how they relate to the SPI. Discuss how higher or lower performance along the chosen indicators can translate into higher and lower SPI performance. (5 Marks)