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 and charges $20 per unit for the first 2,000 units in an order, $17 per unit for the next 2,000 units in the order, and $15 per unit for any unit beyond. Supplier B offers an all-unit quantity discount and charges $20 per unit for orders of no more than 3,000 units and $16 per unit for any bigger orders.

(a) Suppose Company X decides to buy 8,000 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) If Company X wants to place an order of 8,000 units, which supplier offers a lower total cost. Provide the reason for full credit. (4 points)

Explanation / Answer

a) Purchase Quantity= 8000

Cost for buying 8000 units:

20*2000 + 17*2000 + 15*4000= 40000+34000+60000= 134000

Averge cost per unit= 134000/8000= 16.75

b) Cost from supplier A is 16.75 per unit for 8000 unit. Whereas supplier B is offering at 16. Hence supplier B offers a lower total cost.

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