The Steele Bike Company assembles bicycles for a major retail toy outlet. The ma

Question

The Steele Bike Company assembles bicycles for a major retail toy outlet. The main purchase is bicycle frames for making these bicycles. Dan Steele, the owner, wants to locate a low-cost supplier for the frames used in this assembly operation. The supplier will be selected based on total annual cost to supply Steele's needs. Annual requirements are for 100,000 frames, and the company operates 200 days a year. Two suppliers, Acme and State, have quoted the same price for the frames, but quantities, lead times and shipping costs are considerably different. The following data are available for the two suppliers. What are the annual material costs for Acme? SUPPLIER SHIPPING QUANTITY PER SHIPMENT ANNUAL SHIPPING COSTS PRICE / FRAME (p) INVENTORY HOLD COSTS (H) LEAD TIME (DAYS) ADMIN. COSTS ACME 7,500 $35,000 $39 $7.80 7 $20,000 STATE 2,500 $60,000 $39 $7.80 3 $45,000

Explanation / Answer

Annual annual material costs for acme = Quantity x Price = 100,000 x $39 = $3,900,000.

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