You have received a purchase requisition for 5,000 roller bearings. The purchase
ID: 382029 • Letter: Y
Question
You have received a purchase requisition for 5,000 roller bearings. The purchase requisition estimate is $8.00 per unit for a total of $40,000. This estimate is based on a recent estimate prepared by our local engineering staff as part of a routine review of items whose annual total purchase price exceeds $100,000. The estimate was prepared independently using manufacturing principles and factors commonly used in the bearing industry.
The procurement history indicated that the last purchase of the item was 6 months ago. At that time, 2,000 units were purchased at a price of $12.00 each. Brittle Corporation has been the sole source for these bearings since they purchased their only competitor about five years ago. The price for the last competitive price was $5.75 five years ago, just before the merger.
a. Based on the information, what is your best estimate of a reasonable price for the roller bearings?
b. What additional information would be useful in your analysis and where might you go to obtain it?
Explanation / Answer
a. Assuming that the cost of manufacturing and other costs contributing to the selling price of the bearing rise at 10%
The approximate price of a bearing that sold for $5.75 five years back
= 5.75x 1.61 = 9.25 ( inflation of 10%)
= 5.75x 1.76 =10.2 ( inflation of 12%)
As the item purchased six month back came at $12 for 2000 nos, and the company will charge premium for being the sole producer. We can estimate the product at around $11per unit for 5000 quantity.
B. Additional information will comprise of inflation rate, change in cost of raw material and process parameters contributing to cost, market scenario,overhead costs related to utilities, logistics, inventory holding, consumption statistics for this kind of products, alternative products etc. in making a better estimate.
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