PLEASE help me with this homework problem. It is not graded, but I need to under

Question

PLEASE help me with this homework problem. It is not graded, but I need to understand this for a midterm coming up. I have emailed my professor, but he has yet to respond after a few days. THANK YOU!

Pure mountain water is a critical input to Power, a popular mountain climber’s drink. Competition, however, is fierce. Power Drink Inc. has been approached by Pure Mountain Water Inc. with a strategic partnering proposal that will reduce Power’s costs sufficiently to justify a higher price for mountain water. Pure Mountain could convert a water truck to a noncontaminated container truck to transport water directly after quality inspection. The cost for the container truck is $.10 per liter. The container truck is capable of pumping the water directly into the mixing tank for the mixing activity. Information on the activities and the cost per liter for each activity is summarized below:

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1. If the strategic partnering relationship is established which activities will be eliminated for Power?

2. How much can Pure Mountain Water reduce its price per liter and still maintain its profit from sales to Power?

None of the above is correct.

3. What is the maximum price increase for the container truck water Power could pay and not decrease profits?

Water Production Process for Pure Mountain Water Inc. Cost Per Liter for Each Activity 1. Receiving $.10 2. Filtering .10 3. Purification .05 4. Quality Inspection .10 5. Bottling .10 6. Storage .05 7. Shipping .10

Explanation / Answer

1.Here Pure Mountain has converted a water truck into a non contaminated container which is capable of pumping water directly into the mixing tank :

Hence Power Drink can do away with the following activities :

1.Receiving

2.Unpacking

3.Filling

2. If the proposal is accepted, the following costs need not be incurred for Pure Mountain

Bottling – 0.10

Storage – 0.05

Shipping -0.10

In addition it would incur the following cost

Cost of non contaminated container truck -0.10

Hence reduction in cost : 0.10 + 0.05 +0.10 – 0.10 = 0.15

Reduction in cost is b .0.15

3. If the proposal is accepted , the following costs need not be incurred for power drink :

Receiving -0.10

Unpacking -0.05

Filling – 0.10

Hence the maximum price which Power Drink can pay is $0.25

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