OSCM Assignment 15 – Discount vs. TCO You are the Supply Manager for a US electr

Question

OSCM Assignment 15 – Discount vs. TCO

You are the Supply Manager for a US electronics manufacturer. The normal delivery quantity for part #654 is 10,000 units each working day; operating in a JIT mode. Your production schedule is for 20 days/month; 240 working days/year.   

You have a one-year contract with your sole supplier of part #654. The supplier offers to you a 22% price discount, if you take delivery of 2,400,000 units in a single order.

Your assignment is to compare the added costs associated with taking delivery of 2.4 million parts in a single order versus the discount offered.

Factors to be used in your cost calculations:

The current delivered cost of parts = $1.385 per unit.

You currently operate without borrowed capital (money). The single order, 2.4 million parts, will require you to borrow the entire purchase price. You will need to pay your lender 6.125% annual interest. Assume a one-time payment of principle and interest at the end of 1 year (a note).

You will need to rent outside storage capacity.

Givens:

Each shipping carton contains 25 parts

Each pallet of parts contains 40 cartons

In and out handling charges = $8.80 per pallet

Storage per month per pallet = $5.00 (not all pallets are stored for the entire 12 months; the inventory declines)

Insurance on the parts inventory is $13,300 per year (fixed)

Transportation charges from outside storage to your factory @ $66.00 per pallet (10,000 parts per day)

Your Accounting Department uses a factor of 1.5% of the value of the entire purchase as the damage/loss factor for the year.

Continued

Questions to answer:

Using the given factors above, what are the annual additional costs incurred for purchasing and taking ownership of 2.4 million parts in one order?

Interest on loan

In and out handling

Storage

Insurance

Transportation from outside storage to production facility

Damage/loss factor

     Total Additional Cost $ _______________

What is the annual dollar amount of the discount being offered by your supplier?

After comparing the answers to #1 and #2, make your decision to either accept or reject the offer.

Explanation / Answer

Given: normal delivery quantity for part #654 is 10,000 units each working day

production schedule is for 20 days/month; 240 working days/year

supplier offers to you a 22% price discount, if you take delivery of 2,400,000 units in a single order.

current delivered cost of parts = $1.385 per unit;  6.125% annual interest; one-time payment of principle and interest at the end of 1 year

Each shipping carton contains 25 parts

Each pallet of parts contains 40 cartons

In and out handling charges = $8.80 per pallet

Storage per month per pallet = $5.00 (not all pallets are stored for the entire 12 months; the inventory declines)

Insurance on the parts inventory is $13,300 per year (fixed)

Transportation charges from outside storage to your factory @ $66.00 per pallet (10,000 parts per day)

1.5% of the value of the entire purchase as the damage/loss factor for the year.

Solution:

Since the question states that we are currently working without debt and we work on just in time manner which means we have money for exactly 10000 units which is our normal daily delivery quantity,

Thus our working capital = 10000units x cost per unit= 10000x1.385= $13,850..............(1)

Similarly for 2.4 million units, we need = 2.4 x 106 x 1.385= 3324000

Since we get a 22% discount if we buy 2.4 million units, the final cost for 2.4 million units

= 3,324,000 x ( 100%-22%) = 3,324,000x0.78= $2,592,720

Now the amount we need to borrow will be equal to the difference of the above two amounts= 2592720 - 13850 = $ 2,578,870

Now for 1 year the total debt payable will be equal to principle + interest for 1 year = 2578870 x( 1+0.06125) = $ 2,736,825.79............(2)

Now let us calculate the cost for facility:

Since each shipping carton contains 25 parts and each pallet of parts contains 40 cartons, therefore one pallet carries 25*40=1000 units, which means we need 10 pallets everyday for 10,000 units to be delivered.

Each pallet costs $8.80, which means we cost $88 for 10 pallets everyday and 240* 88= $ 21,120 for whole year and 2.4 million parts...........(3)

storage cost for 1 pallet is $ 5 per month, so for the 1st month the storage cost = 5*2400=$ 12,000

Assuming equal number of pallets get out of the storage say, 2400/12=200pallets every month ( or 10 pallets for 10000 parts for 20 days a month = 20*10=200)

thus the next month the storage cost for 2200 pallets = 5 * 2200 =$ 11,000

Similarly the storage cost for the entire year = 12000+11000+10000+9000....+1000= $ 66,000...........(4)

Insurance on the parts inventory is $13,300.................(5)

Transportation cost is $ 66 per pallet, since daily we tranport 10 pallets we cost 10*66=$ 660 per day, since we have 20 working days per month, so for 1 year the transportation cost will be = $660*20days per month * 12 months = $ 158,400...........(6)

damage/loss factor for the year = 1.5% of the purchase value =0.015* 2,736,825.79 = $ 41,052.39....(7)

Thus the total cost for one year, if we choose the #2 option of purchasing 2.4 million units on discount

= (2)+(3)+(4)+(5)+(6)+(7)= 2,736,825.79+21,120+66,000+13,300+158,400+41,052.39= $3,036,698.18...........(8)

For #1 option the cost for the total year equals= $13850*240= $3,324,000.....................(9)

Thus the difference between the two option is = 3,324,000-3,036,698.18 = $287,301.82  profit on the total cost for one year by choosing option #2. Thus choosing option #2 is the correct decision.

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