From the: SATTVA eTECH: Enhancing Component Sourcing Flexibility

If Sattva were to go with the options contract scenario proposed by Maxtronics, how many option units should Sattva reserve? What are the expected profits for Sattva and Maxtronics in this scenario? Please show your work

Sattva sourced AC/DC power module, a bulk component, from Maxtronics Inc., a Taiwanese firm. Exhibit 1 provides the details about this component. In 2019, the contract between Sattva and Maxtronics specified the purchase quantity and unit procurement price of 3700. Due to close relationship with the supplier, developed through long-term relationship, Sattva shared the historical demand information for the component with Maxtronics. Maxtronics also preferred this long-term contracting relationship as it generated steady business. Sattva also benefited from the long-term contracts as Maxtronics offered low unit procurement price as compared to the average price at which the component was sold in the market. The unit manufacturing cost of component was around $200. Since the expected lifetime of this component was around four years, Sattva typically placed an order once in every four years. The reason for the combined four-year order was that the supplier only agreed to supply large order quantities. Hence, on average, after every four years, Maxtronics would release a newer generation component, and therefore, the old generation component would become obsolete. At around that point of time, Sattva would place an order for the requirement of the next four years. The component inventory leftovers at Sattva's end or at Maxtronics's end were salvaged at unit price of 325. The average price charged by Sattva towards the final product was around 35000. Sattva sourced AC/DC power module, a bulk component, from Maxtronics Inc., a Taiwanese firm. Exhibit 1 provides the details about this component. In 2019, the contract between Sattva and Maxtronics specified the purchase quantity and unit procurement price of 3700. Due to close relationship with the supplier, developed through long-term relationship, Sattva shared the historical demand information for the component with Maxtronics. Maxtronics also preferred this long-term contracting relationship as it generated steady business. Sattva also benefited from the long-term contracts as Maxtronics offered low unit procurement price as compared to the average price at which the component was sold in the market. The unit manufacturing cost of component was around $200. Since the expected lifetime of this component was around four years, Sattva typically placed an order once in every four years. The reason for the combined four-year order was that the supplier only agreed to supply large order quantities. Hence, on average, after every four years, Maxtronics would release a newer generation component, and therefore, the old generation component would become obsolete. At around that point of time, Sattva would place an order for the requirement of the next four years. The component inventory leftovers at Sattva's end or at Maxtronics's end were salvaged at unit price of 325. The average price charged by Sattva towards the final product was around 35000