Question

A company can purchase component Hfrom 3 potential suppliers. Supplier A charges a fee of $5.50 per component. Supplier B charges $1500 per order plus $2.00 per component ordered. Supplier C charges $4.00 per component,andrequires the buyer to pay for at least 280components (even if the order size is less than 280).

Required:
a. What is the full range of order sizes where each supplier is optimal?
b. The company decided to buy 300 units of component H from supplier A. How much money could the company have saved if it purchased the 300 units from supplier C instead of supplier A?
c. Next week supplier B will be running a 10% off special. If the company needs to purchase 600 units of component H during the special, which supplier should be chosen?

Answer 1

a. The full range of the order sizes where each supplier is optimal is:

Supplier A, from 1 to 280 units

Supplier B, from 1,000 units upwards

Supplier C, from 280 to 1,000

b. The company decided to buy 300 units of component H from supplier A. How much money could the company have saved if it purchased the 300 units from supplier C instead of supplier A?

Savings from purchasing from C instead of from A = $450

c. To purchase 600 units during B's 10% off special:

Supplier C should be chosen. It enjoys the minimal cost-advantage.

Step-by-step explanation:

a) Data and Calculations:

b) Cost of purchasing 300 units from A = $1,650 ($5.50 * 300)

Cost of purchasing 300 units from C = $1,200 ($4.00 * 300)

Savings from purchasing from C = $450 ($1,650 - $1,200)

c) 10% off special by B. This reduces its price from $2 to $1.80 plus the $1,500 per order

Cost of purchasing 600 units from B during the special discount offer =

$1,500 + ($1.80 * 600) = $2,580

Cost of purchasing 600 units from A during B's special discount offer =

$5.50 * 600 = $3,300

Cost of purchasing 600 units from C during B's special discount offer =

$4 * 600 = $2,400

Range of order sizes:

Supplier A, from 1 to 280 units: Above 280 units, Supplier C will be preferred in terms of total cost.

Supplier B, from 1,000 units upwards: This will reduce the unit cost to $3.50 or below.

Supplier C, from 280 to 1,000: Below 280 units, Supplier A performs better than C.