Question
JFI Foods produces processed foods. Their basic ingredient is a feedstock that is mixed with other ingredients to produce the final packaged product JFI purchases the teedst Materials and Red Oak Chemicals. The quality of the f feedstock. If the feedstock is not correc f ock from two suppliers, Rex he quality of the final product depends directy on the quality of the JFI has to dispose of the entire batch All teedstock in this business is occasionally bad," so JFi measures what they call the "yieid," which is measured as Yield Good output Input where the output and inputs are both measured in tons. As a benchmark, JFl expects to get 14 80 tons of good output for every 20 tons of feedstock purchased for a yield of 74 percent ( 14 80 tans of output- 20 tons of feedstock) Data on the two suppliers for the past year follow: Rex Materials Rea Cak Chemicals Totat 1350 1.13805 2,250 3 800 1,426 502,564.55 s 290210240.00 Total inputs purchased Average price (per ton) The sales manager of Red Oak Chemicals has proposed to the purchasing manager at JFI that Red Oak be given an exclusive contract to supply the feedstock if they receive the contract, Red Oak wil guarantee an 74 percent yield on the feedstock they supply Required:
Explanation / Answer
The calculation of yield ratio of REX material and Red Oak Chemicals is as under: REX Materials RED Oak Chemicals Purchased inputs 1350 2250 Output 1138.05 1426.5 Yield ratio=Output/input 0.843 0.634 Average per ton $290 $210 Average rate of input for one unit of output (average rate/yield ratio) $ 344.01 $ 331.23 Ist preference (Effective cost per ton=$290/0.843=$344.01, ($210/0.634)=$331.23 The RED Oak Chemicals has lower input cost per unit therefore the company should prefer to purchase all its materials. The maximum rate of input the company would be willing to pay is ($331.23*74%) per ton that is $245.11 per ton.
