Decision-Making Case Using Spreadsheet: Purchasing Analysis

Kayo Computer assembles and sells special computers. Each computer needs one custom-designed printed circuit board (PCB). Kayo has contracted to buy the PCBs from an outside PCB manufacturer, Apex Manufacturing. The long-term contract stipulates that Kayo pays $200 per board to Apex for up to 2,000 PCBs. If the annual order quantity exceeds 2,000 PCBs, then Apex is obligated to give a discount of $40 per board for the portion beyond 2,000, thus selling them at $160.

Kayo can also buy the same PCBs from another manufacturer, TCI Electronics, that offers a lower price of $120 per PCB but asks a one-time payment of $100,000 as a nonrefundable design and engineering fee. As a purchasing manager, you have determined that Kayo may use PCBs from either of the two manufacturers, or from both in any mixture without any manufacturing cost or compatibility problems.

The PCB along with other components are assembled by Kayo into its special computer. The variable assembly cost of the Kayo special computer is $450 each with an annual fixed cost of $1,500,000. At the moment no one is sure how many Kayo computers the company can sell for the next year. The VP of Finance at Kayo Computer, has notified that this model of Kayo computer will be discontinued after next year and so any one-time fee that might be paid to TCI must be justified based on one-year's sales alone. You will evaluate certain economic and legal issue as part of your financial plan for the next year.

In reviewing the Apex contract, you note that it is requires Kayo to purchase at least 20% of the PCBs used in the Kayo computers sold (and not less than 1,000 PCBs) from Apex. The contract also contains a liquidated damages clause in the event of Kayos default in the amount of $1,000,000.

You just received a market analysis report revealing that unit sales will depend on the price of the computer. At the price of $1,000, about 5,000 units will be sold, but for every increase (or decrease) of $100, sales will decrease (or increase, respectively) by 1,000 units.

Use Excel to build spreadsheet analysis models that maximizes Kayos profit next year, by finding (a) the optimal price, and (b) the optimal number of boards to buy from Apex and from TCI while still honoring the original contract with Apex.

It is not allowed to use Solver to solve this problem. You should build your own analysis models in spreadsheet.