Davis Fabricators buys metal for manufacturing from two suppliers, Alpha Metals

Question

Davis Fabricators buys metal for manufacturing from two suppliers, Alpha Metals and First Parts. If the metal is delivered late, the shipment to the customer is delayed. Delayed shipments lead to contractual penalties that call for Davis to reimburse a portion of the purchase price to the customer.

During the past quarter, the purchasing and delivery data for the two suppliers showed the following:

The accounting department recorded $40,625 as the cost of late deliveries to customers.

Assume that the average quality, measured by the percentage of late deliveries, and prices from the two companies will continue as in the past. What is the effective price for metal from the two companies when late deliveries are considered? (Do not round your intermediate calculations. Round your answers to 2 decimal places. Omit the "$" sign in your response.)

During the past quarter, the purchasing and delivery data for the two suppliers showed the following:

Explanation / Answer

number of tons delivered = 11,000 * 25% + 7,500 * 5% = 3125

cost of late deliveries = 40,625 (given)

cost of late delivery per toner ton = (40,625/3125) = 13

now computing the effective price

alpha first

average purchase price per ton 10 12

additional cost of late delivery per ton 13 10

probabality of late delivery 25% 5%   

expected cost of late delivery per ton 3.25 0.5

effective cost per ton 13.25 12.5

effective cost per ton 13.25 12.5

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