7.

A buyer received bids and other relevant information from two suppliers for a vital component part for its latest product. Given the following information, use a total cost analysis to determine which supplier should be chosen. Late delivery of the component results in 35 percent lost sales and 65 percent back orders of finished goods.

Order lot size	2500	units
Annual demand	62,500	units
Weight per part	15	lbs
Order processing cost	25	$/order
Inventory carrying rate	25	%/year
Cost of working capital	30	%/year
Profit Margin	20	%/unit
Price of finished goods	200	$/unit
Backorder Cost	10	$/unit

Supplier 1 is located 250 miles away. They have a quality rating of 1.5% and a delivery rating of 3%. The terms they offer are 1%15, net 30. The unit cost from supplier 1 is $30 per unit.

Supplier 2 is located 200 miles away. They have a quality rating of 2% and a delivery rating of 2%. The terms they offer are 2%10, net 30. The unit cost from supplier 2 is $32 per unit.

Assume 365 days/year. Note: per ton-mile = 2,000 pounds per mile

For shipping the costs are:

Truckload (TL 40,000 lbs): $0.90 per ton-mile

Less-than-truckload (LTL): $1.22 per ton-mile

What are the expected costs of quality if the company uses supplier 2? (Round to the nearest whole number)

	a.	$30,000
	b.	None of these
	c.	$37,500
	d.	$40,000
	e.	$28,125