You are a logistics manager for Alphasmart, a smartphone manufacturer. you are t

Question

You are a logistics manager for Alphasmart, a smartphone manufacturer. you are trying to select a single supplier for the raw material for your product. two companies can provide the necessary materials- Hunts and Madis. Hunts has sufficient capacity to meet you demand and charges $2.00 per unit. Madis is a small supplier with a limited capacity, can supply up to 50,000 units per year, and charges $1.80 per unit of the raw material. If you do not get raw material from your supplier, you buy from the spot market at $4 per unit.

Alphasmart sold 50,000 smartphones last year and estimates demand for smartphones to go up by 20% with a probability of 70 percent and to remain the same as last year with a probability of 30%. Alphasmart uses a discount rate of 10 percent. Assume all costs are incurred at the end of the year and only one supplier needs to be selected. Which supplier will you select based on the present value of your annual cost.

Explanation / Answer

there are two possibilities. first company can buy from Hunts alone or combinedly from Madis and spot market. but first one is preferable as it will give more benefit to company. Alphasmart will go for Hunts. as there is 20 % increase in demand in the coming year which Madis can not fulfil. since Madis can supply raw material for 50000 units per year.

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