Upon graduation, you decide that you wish to get in on the ground floor of the e

Question

Upon graduation, you decide that you wish to get in on the ground floor of the e-tailing revolution and develop your own online business. You decide that a large opportunity exists in providing private-label apparel to a niche segment of Generation Y consumers. In the process of planning your business, your preliminary sales forcast lead you to believe that your first year's sales will be $500,000. You have identified two major manufactorers that can make the merchandise you want to sell online. One manufacturer is in a distant city and is able to promise seven-day delivery on orders of more than $5,000.00. The second manufacturer is located only 80 miles away and provides next-day delivery on orders of more than $500.00 placed by 1 p.m. Unfortunately, the nearby manufacturer has slightly higher prices. Consequently, you estimate by purchasing through this source your gross margin would be 41 percent versus 43 percent by purchasing from the more distant manufacturer. However, because the nearby manufacturer is able to provide frequent and smaller deliveries, you estimate that your average inventory would be $25,000 versus $ 30,000 if you used the more distant manufacturer as a supply source. Easch manufacturer sells on terms of 2 percent/10 net 30. This means that if the invoice is paid within 10 days, a 2 percent discount can be taken; if not, the net invoice is due within 30 days. Which supply source should you select? (Hint: compute the gross margin return on inventory investment, which is defined as the gross margin dolllars divided by average inventory investment).

Explanation / Answer

I would choice the nearby manufacture due to gross margin being merely 2 percent higher so (the prices is only 2 percent higher) whereas if you want to save that two percent, you would have to purchase 10 times as much goods per purchase, (5000 compare to 500) to save that 2 percent.

Unless the company turnover rate is extremely high, I would not go with the distant manufacture (the startup company is only starting, so there is no way the turnover rate for products will be that great at first)

Plus, a start-up company do not want to stock huge inventory because if you do go bankrupt, your risks are greater if you hold 10 times more assets ............ for a 2 percent discount (makes no business sense

so the closer company that only require $500 per order

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