Assignment #3 TCO vs. Discount Decision Making

You are the Supply Manager for a US electronics manufacturer. The normal delivery quantity for part #654 is 10,000 units each working day; operating in a JIT mode. Your production schedule is for 240 working days/year.

You have a one-year contract with your sole supplier of part #654. The supplier offers to you a 22% price discount, if you take delivery of 2,400,000 units in a single order.

Your assignment is to compare the added costs associated with taking delivery of 2.4 million parts in a single order versus the discount offered.

Factors to be used in your cost calculations:

• The current delivered cost of parts = $1.385 per unit.
• You currently operate without borrowed capital (money). The single order, 2.4 million parts, will require you to borrow the entire purchase price. You will need to pay your lender 6.125% annual interest. Assume a one-time payment of principle and interest at the end of 1 year (a note).
• You will need to rent outside storage for the 2.4 million units.

Givens:

Each shipping carton contains 25 parts

Each pallet of parts contains 40 cartons

In and out handling charges = $8.80 per pallet

Storage per month per pallet = $5.00. Pallets are stored for an average of six (6) months.

Insurance on the parts inventory is $13,300 per year (fixed)

Transportation charges from outside storage to your factory @ $66.00 per pallet (10,000 parts per day)

• Your Accounting Department uses a factor of 1.5% of the value of the entire purchase as the damage/loss factor for the year.

DKI Nov 2021 copyright

Questions to answer:

Using the given factors above, what are the additional annual costs related to purchasing and taking ownership of 2.4 million parts in one order?

1. Interest on borrowed money
2. In and out handling
3. Storage
4. Insurance
5. Transportation from outside storage to the production facility
6. Damage/loss factor
7. Total Additional Cost = $ _______________ (add up answers for 1 thru 6)

1. What is the annual dollar amount of the discount being offered by your supplier?

1. After comparing the answers to #7 and #8, will you accept or reject the offer from the supplier?

Show your math