Question

Roscoe Construction Company (RCC) is a company specializing in building roads and highways. As a part of its business, it receives supplies of aggregate from two suppliers Toorak Gravel (TG) and Kilda Corporation (KC). RCC purchasing has expressed a preference for KC based on price, but occasionally has to order from TG when KC cannot fill the order RCC has recently had problems with the quality and the timeliness of deliveries. When a supplier delivers a load to RCC, it goes through an initial inspection to assure it meets specification. If the load fails the initial inspection, it goes through a secondary inspection to determine the exact issue. Almost always, the issue can be resolved and the load can be used. The initial inspection costs $1,000 per load. A secondary inspection, which is more thorough, costs $5,000 per load. If a delivery is delayed, RCC has to hire temporary workers or pay overtime to some employees. The average cost of a delayed load is $2.000. The following are summary statistics from last year's purchases from the two suppliers Toorak Gravel 100 Number of loads Average tons per load Average price per ton Number of initial inspections passed Number of delayed deliveries Kilda Corp. 400 5.ee $ 5.90 10.ee 6.00 $ The sales manager of Kilda Corporation has proposed to the purchasing manager at RCC that KC be given an exclusive contract to supply the aggregate. Assume that the total annual demand remains the same. If it receives the contract, KC will deliver the aggregate in the same average-sized load as it does currently

Answer 1

Annual demand of material by Rcc - (lopto x 100)+ (5000x400) 3000,00 tons No. of loads to be supplied by kc in case. to receives the exclusive contact. 3000 000 5oud 600 loads. MAMMAN Cost to Rcc if a load does not pass initial inspection & $5000 per load cast of initial inspection $1000 per load Average cost of a delayed wad : $2000 per load VUVITITITIITTI Now, Let us calculate the annual cost of material to RCC from the statistics from the a last year. Total Annual Cost Cost of purchases from TG + cost of purchases from &c 9 Material Cout of purchases e Material Cost + Initial inspection coat +. Secondary Inspection Cost & Cost for delayed deliveries.

Cost of Purchases .. from TG 999999997 (100 x 10000 6) + (100 x $1000) + [C100-01)$ 5 000] + (10 * $2009) $6 poopoo + $109,000 + $ 30,000 + $ 20,000 $ 6,150,000 Cost of Purchases from ke < (400 x 5000+ $5.9) + (400 * $1000) + [(400 - 300 x $5000] + (80 x $2000] $1,800,000 + $ 400,000 + $ 500,000+ $ 160,000 $12,860,000 Total Annual Costa $ 12, 860,000 of material $6, 150,000 + $ 19,010, 000 This implies that RCC will be meady maximum price to ko such that its does not exceeds the total cost of year purchases. to pay the total cost the last

- 400 400 No. of loads to be supplied 600 loads : kc during t (calculated previously Percentage of unītial uinspection passing 300 x 100 ie T5 / Percentage of delayed volaliveries 80 x 100 o de 20% for the current year, the number of loads is 600 and of the inspection passing percentage and deliverips timelines remains the same, then. No of initial inspection passing vopecuan passiny - 600 x 675). 600x 7 current year a 450 ( No of delayed deliveries in current year 6000 x 20%. 120 (a) - Let the manimum price to be offered by RCC to KC be se The equation will formed as a Total cost of material. Total icoot of material last year current year HHHHHHHHH

$19,010,000 -600 x 5000 x &x) + (600 x $1000] + [(6oo - 450) × $ 5000] + [120 x 2000] $19,010,000 3,000,000 x &x] + & 600,000+. $ 150,000 + $ 240,000 110,oo (3,000,000 x 8x] + $1590,000 $19,010,000 - $1.590,000 e 3000poo x $4 $17, 420,000 3,000,000 x $a 17,420, ooo 3,000,000 x ie x = $5.80666 . $5.81 Therefore, the maximum price Rcc should offer KC for exclusive contract is $5.81 per ton.

Kc guarantee no delayed deliveries or compensation associated with deland deliveries, the maximum price should be Let the monimum price be y. The equation is: Total cost of material Total cost of material last year in current year $ 19,0 10,000 + [500 x 500 x $y] +[600 x 41000]+ [(600 - 450) × $ 5000] + [0 x $2000] $19,010,000 + [3,000,000 x $y] + $600,000 + $ 150,00D $19,010,000 - $1,350,000 3000,000 $y $14,669,000 - 3,000,000 $y 4c 17,660,000 I 3,000,000 y $5.885 ie yo $5.89 Therefore, the monimum price that RCC Thoued a offer kc for no delayed deliver is $5.89 per ton a