Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The John Equipment company that produces refrigerator engines needs to procure refrigerant gases from an external supplier. It is common that refrigerant gases are ordered

The John Equipment company that produces refrigerator engines needs to procure refrigerant gases from an external supplier. It is common that refrigerant gases are ordered and received in boxes of 20kg and are costly to keep in inventory. The company estimates that the inventory carrying cost of each box is equivalent to 25% of its cost per year.
Based on its target production, the company needs 2,600 boxes of refrigerant gases every year. There are currently two suppliers that the company can procure its refrigerant gases from. Both suppliers sell at the same unit price of $1,200/box, however they differ in their ordering and delivery policies:
Supplier A that is located in Australia is a big supplier and delivers the ordered amount on the same day, and it charges $1,000 for each order irrespective of the amount ordered.
Supplier B that is located in South Islan is a fairly smaller supplier and usually do not have refrigerant gases in stock for instant delivery. It can produce and deliver only 100 boxes per week, but it does eventually deliver the entire ordered amount. This supplier charges $1,500 for each order irrespective of the amount ordered.
Assume 50 weeks in a year.
a) What are the optimal order quantity and total procurement cost if the company choose Supplier A?[5 marks]
b) What are the optimal order quantity and total procurement cost if the company choose Supplier B?[5 marks]
c) One of the board members of the company makes this argument that because both suppliers offer the same price, but Supplier A has lower ordering cost and it is also faster in delivering, it is the obvious choice. The company board finds this sensible. Based on your calculations in parts (a) and (b), do you agree with this choice? If not, how would you justify your choice and convince the board that your choice is more sensible (in simple words that the board members would understand)?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Great Boss Great Management

Authors: S. M. H. Gibson

1st Edition

9798842893430

More Books

Students also viewed these General Management questions