Company X can purchase a certain component from either Supplier A or Supplier B.

Question

Company X can purchase a certain component from either Supplier A or Supplier B. Supplier A offers an incremental quantity discount, while Supplier B offers an all-unit quantity discount.

To be specific, Supplier A charges $20 per unit for the first 1,000 units in an order and $17 per unit for any unit beyond in the order. Supplier B charges $19 per unit for orders of no more than 1,500 units and $18 per unit for any bigger orders.

Suppose Company X decides to purchase 5,000 units from Supplier A. What is the average unit cost of the order? Please provide at least one step of calculation and the correct answer for full credit. (4 points)

(b) Suppose Company X wants to place an order of 5,000 units. Which supplier offers a lower total cost? Please provide the reason and the correct answer for full credit. (4 points)

Explanation / Answer

Q1) Number of units of purchase from supplier A = 5000

Total cost of order = (20*1000)+(17*4000) = 88000 $

Average unit cost of the order = 88000/5000 = 17.6 $

Q2) For 5000 units, supplier A offers total cost of 88000 $

Total cost offered by supplier B = (18*5000) = 90000 $

Hence, supplier A offers lowe total cost.

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