You are the Supply Manager for a US electronics manufacturer. The normal deliver

Question

You are the Supply Manager for a US electronics manufacturer. The normal delivery quantity for part #654 is 10,000 units each working day; operating in a JIT mode. Your production schedule is for 20 days/month; 240 working days/year.   

You have a one-year contract with your sole supplier of part #654. The supplier offers to you a 22% price discount, if you take delivery of 2,400,000 units in a single order.

Your assignment is to compare the added costs associated with taking delivery of 2.4 million parts in a single order versus the discount offered.

Factors to be used in your cost calculations:

-The current delivered cost of parts = $1.385 per unit.

-You currently operate without borrowed capital (money). The single order, 2.4 million parts, will require you to borrow the entire purchase price. You will need to pay your lender 6.125% annual interest. Assume a one-time payment of principal and interest at the end of 1 year (a note).

-You will need to rent outside storage capacity.

Givens:

-Each shipping carton contains 25 parts

-Each pallet of parts contains 40 cartons

-In and out handling charges = $8.80 per pallet

-Storage per month per pallet = $5.00 (not all pallets are stored for the entire 12 months; the inventory declines)

-Insurance on the parts inventory is $13,300 per year (fixed)

-Transportation charges from outside storage to your factory @ $66.00 per pallet (10,000 parts per day)

Your Accounting Department uses a factor of 1.5% of the value of the entire purchase as the damage/loss factor for the year.

Continued

Questions to answer:

Using the given factors above, what are the annual additional costs incurred for purchasing and taking ownership of 2.4 million parts in one order?

Interest on loan

In and out handling

Storage

Insurance

Transportation from outside storage to production facility

Damage/loss factor

     Total Additional Cost $ _______________

What is the annual dollar amount of the discount being offered by your supplier?

After comparing the answers to #1 and #2, make your decision to either accept or reject the offer.

Explanation / Answer

Additional Cost Calculated as follows:

Additional Intrest per year = 2592720 *0.0625*1 = 158804.1

Storage charges

Assuming He sells 200000 Parts per month = 200000 /(25*40) = 200 Pallets per month = 10 Pallets per day

Yearly Sales = 200*12 = 2400 Pallets

So by end of first month storage cost will be = 2400 * 5 = 12000

End of second month storage cost = 2200 *5 = 11000 (200 sold after first month)

End of third month storage cost = 2000*5 = 10000 (400 sold after second month)

Simarly calculating for all the month and adding them total storage cost = 78000

Insurance(fixed) = 13380

Transportation charge = 66 * 10 * 240 = 158400

Damage loss = 0.015 * 2592720

Total Additional Cost = 468594.9

Net Discount = 731280 - 468594.9 = 262685.1

If first option is selected then additional cost of 34500 needs to be paid with no discount

So , Supply Manger should take the discount and accept the offer

Qty JIT Mode Daily 10000 JIT Mode Discounted Monthly 200000 Price per unit 1.385 1.385 Yearly 2400000 Total Price 3324000 3324000 Cartons 96000 Discount 0 731280 Pallets 2400 Discounted Price 3324000 2592720 Pallets per day 10 Discounted Mode Additional Costs Qty 2400000 Borrowed Money 0 2592720 Cartons 96000 Intrest @ 1 year 0 158804.1 Pallets 2400 Monthly Pallets 200 In and Out Handling charges per pallet 8.8 8.8 Total Charges 21120 21120 Storage Charges 0 78000 Insurance 13380 13380 Transportation charge outside factory 0 158400 Damage loss 0 38890.8 Total Addtional Cost 34500 468594.9 Profit -34500 262685.1

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