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Case 1

The purchasing department of Bradley Inc. is responsible for companywide purchasing. Its total costs are assigned to each division based on the number of purchase orders the purchasing department processes for each division. The purchasing department's fixed costs are $300,000 per year, and it expects to process15, 000 purchase orders (POs) at a variable cost of $50 per purchase order. Purchasing costs do not include the cost of the items purchased.
Purchasing processed 16,000 POs during the year and incurred total costs (excluding the cost of the items purchased) of $1,180,000.
a. Design a performance evaluation report for the purchasing department.
b. Describe what each item in the report measures.
c. Evaluate the performance of the purchasing department.
d. What other performance measures would you want to collect and report for the purchasing department?

Solution Preview

a. Design a performance evaluation report for the purchasing department.

Purchase Order Index = Actual Number of Purchase Orders Processed / Forecasted Number of Purchase Orders Processed
Variable Cost per Purchase Order = (Total Costs Incurred - Fixed Cost Incurred) / Number of Purchase Orders Processed
Department Gross Margin Index= Actual Total Costs Incurred / Fixed Total Costs Incurred

b. Describe what each item in the report measures.

The Purchase Order Index measures the efficiency of the actual purchase orders processed vs. the ...

Solution Summary

The performance evaluation reports for purchasing departments are examined.

$2.19