Fame Company manufactures engines. Fame produces all the parts necessary for its engines, except for one electronic component, which is purchased from two local suppliers: Hydra International and Parable Company. Both suppliers are reliable and rarely deliver late. Hydra sells the component for $12.00 per unit, while Parable sells the same component for $10.00. Fame purchases 80% of its components from Parable because of the lower price it offers. The total annual demand is 95,000 units.
I. Activity Data
Activity Cost
Inspecting components (sampling only) $ 210,000
Reworking products (due to failed component) $2,454,000
Warranty work (due to failed component) $1,923,000
II. Supplier Data
Hydra Parable
International Company
Unit purchase price $12.00 $10.00
Units purchased 19,000 76,000
Sampling hours 60 2,600
Rework hours 150 3,800
Warranty hours 550 7,000
Suppose that Fame loses $3,500,000 in sales per year because of its reputation for defective units attributable to failed components. Using warranty hours, assign the proportional cost of lost sales to Parable Company. What is the increase in the cost per component? (Note: Round the lost sales per warranty hour and the cost of the component to two decimal places.)