Relevant Costing-Buying Decision-Argos Company Argos Company needs a total of 125 tonnes of sheet steel-50 tonnes of 2-inch width and 75 tonnes of 4-inch width-for a customer's job. Argos can purchase the sheet steel in these widths directly from a steel manufacturer (Actium Corporation) or it can purchase sheet steel from Actium that is 24 inches wide and have it slit into the desired widths by Heraclion Inc. Both vendors are local and have previously supplied materials to Argos. Heraclion specializes in slitting sheet steel provided by a customer into any desired width. When negotiating a contract, Heraclion tells its customers there is a scrap loss in the slitting operation, but this loss has never exceeded 2.5 percent of input tonnes. Heraclion recommends if a customer has a specific tonnage requirement, it should supply an adequate amount of steel to yield the desired quantity. Heraclion's charges for steel slitting are based on good output, not input handled. The 24-inch wide sheet steel is a regular stock item of Actium and can be shipped to Heraclion within five days after receipt of Argos's purchase order. If Actium is to do the slitting, shipment to Argos would be scheduled for 15 days after receipt of Argos's purchase order. Heraclion has quoted delivery at 10 days after receipt of the sheet steel. In prior dealings, Argos has found both Actium and Heraclion to be reliable vendors with high quality products. Argos has received the following price quotations from Actium and Heraclion: Actium Corporation Rates Size Gauge Quantity Cost Per Tonne 2-inch 50 tonnes $210 4-inch 14 75 tonnes 200 24-inch 14 125 tonnes 180 Heraclion Inc. Steel Slitting Rates Price Per Tonne of put Size Gauge Quantity 2-inch 14 50 tonnes $18 4-inch 14 75 tonnes 15 Freight and Handling Charges Destination Cost Per Tonne Actium to Argos $10.00 Actium to Heraclion 5.00 Heraclion to Argos 7.50 In addition, Heraclion informed Argos that if it purchases 100 output tonnes of each width, the per-tonne slitting rates would be reduced 12 percent. Argos knows the same customer will be placing a new order in the near future for the same material and estimates it would have to store the additional tonnage for an average of two months at a carrying cost of $1.50 per month for each tonne. There would be no change in Actium's prices for additional tonnes delivered to Heraclion. Required: Prepare an analysis that will show whether Argos Company should: 1a. Purchase the required slit steel directly from Actium Corporation. Argos Company Analysis 2-inch 51.28 X 4-inch 76.92 X Shipping X $ 1b. Purchase the 24-inch wide sheet steel from Actium and have it slit by Heraclion into 50 output tonnes 2 inches wide and 75 output tonnes 4 inches wide. Heraclion Company Analysis Cost of steel from Actium 23,076 x Cost of shipping from Actium to Heraclion 641 Cost of slitting at Pre-cut: 2-inch 900 4-inch 1,125 Cost of shipping to Argos 937.5 X 23,976 1c. Take advantage of Heraclion's reduced slitting rates by purchasing 100 output tonnes of each width. Argos Company Analysis Cost of steel from Actium $ 36,922 23,976 x 1c. Take advantage of Heraclion's reduced slitting rates by purchasing 100 output tonnes of each width. Argos Company Analysis Cost of steel from Actium 36,922 X Cost of shipping from Actium to Heraclion 1,026 Cost of slitting at pre-cut: 2-inch 1,584 4-inch 1,320 Cost of shipping to Argos 1,500 Cost of storage 113 42,464 x For comparison purposes, the cost for immediate needs is: Cost of steel Cost of shipping from Actium to Heraclion Cost of slitting: 2-inch 4-inch Cost of shipping to Argos Cost of storage 2. Without prejudice to your answer to Requirement 1, present qualitative arguments why Argos Company may favour the purchase of the slit steel directly from Actium Corporation. The input in the box below will not be graded, but may be reviewed and considered by your instructor. m
