Your company assembles five different models of a motor scooter that is sold in specialty stores in the United States. The company uses the same engine for all five models. You have been given the assignment of choosing a supplier for these engines for the coming year. Due to the size of your warehouse and other administrative restrictions, you must order the engines in lot sizes of 1,000 each.

Because of the unique characteristics of the engine, special tooling is needed during the manufacturing process for which you agree to reimburse the supplier. Your assistant has obtained quotes from two reliable engine suppliers and you need to decide which to use. The following data have been collected:

Requirements (annual forecast)

Weight per engine 22 pounds Order processing cost $125 per order Inventory carry cost 20 percent of the average value of inventory per year Note: Assume that half of the lot size is in inventory, on average (1,000/2 = 500 units).
Two qualified suppliers have submitted the following quotations:
Order Quantity Supplier 1 Unit Price Supplier 2 Unit Price 1 to 1,499 units/order $510.00 $505.00 1,500 to 2,999 units/order 500.00 $505.00 3,000+ units/order 490.00 488.00 Tooling costs $22,000 $20,000 Distance 125 miles 100 miles Your assistant has obtained the following freight rates from your carrier:
Truckload (40,000 lb. each load): $0.80 per ton-mile Less-than-truckload: $1.20 per ton-mile Note: Per ton-mile = 2,000 lb. per mile

a. Perform a total cost of ownership analysis and select a supplier.

b. Would it make economic sense to order in truckload quantities?
Would your supplier selection change if you ordered truckload quantities?
LO16-4