As a manager of the WeDoWell Corporation, you have negotiated with several vendo

Question

As a manager of the WeDoWell Corporation, you have negotiated with several vendors and are on the verge of signing an eight-year contract with Bolts Enterprises. Under the contract, they would ship to you 2,000 titanium bolts per month at a price of $1,000 per bolt. Your assistant has just brought you an article from a trade publication that indicates another company has developed a new technology that reduces the cost of producing the titanium bolts. How would this information affect the optimal length of your contract with Bolts Enterprises? Explain.

Explanation / Answer

Under the contract, they would ship to you 2,000 titanium bolts per month at a price of $1,000 per bolt. 8-year contract: Since newer technology is cheaper than contracted one. Either two must happen for economic benefit of the company 1) optimal length of contract should decrease , along with contract parameters like quantity of bolts (if changeable) length will depend upon contract value. 2) The company must force Bolts Enterprises to reduce the cost to the estimated, and enter into some sort of mutual deal.

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