You have just received 10 units of a special sub assembly from an electronics ma

Question

You have just received 10 units of a special sub assembly from an electronics manufacturer at a price of $250 per unit. A new order has also just come in for your computer's product that uses these sub assemblies, and you wish to purchase 40 more to be shipped in lots of 10 units each. (The sub assemblies are bulky and you need only 10 a month to fill your new order.) A. Assuming a 70% learning curve by your supplier on a similar product last year, how much should you pay for each lot? Assume that the learning rate of 70% applies to each lot of 10 units, not each unit. B. Suppose you are the supplier and can product 20 units now, but cannot start production on the second 20 units for two months. What price would you try to negotiate for the last 20 units?

Explanation / Answer

2. You have just received 10 units of a special subassembly from an electronics manufacturer at a price of $250 per unit. A new order also has just come in for your company's product that uses these subassemblies, and you wish to purchase 40 more to be shipped in lots of 10 units each. (The subassemblies are bulky, and you need only 10 a month to fill your new order.) a. Assuming a 70 percent learning curve by your supplier on a similar product last year, how much should you pay for each lot? Assume that the learning rate of 70 percent applies to each lot of 10 units, not each unit. Unit 1st ten 2nd ten 3rd ten 4th ten 5th ten Ratio (Exhibit 4A.4) 1.0000 .7000 .5682 .4900 .4368 Cost $2,500.00 $2,500 x .7000 = $1,750.00 $2,500 x .5682 = $1,420.50 $2,500 x .4900 = $1,225.00 $2,500 x .4368 = $1,092.00 ------============================================ b. Suppose you are the supplier and can produce 20 units now but cannot start production on the second 20 units for two months. What price would you try to negotiate for the last 20 units? The price should be between the cost of the first twenty ($2,500 + $1,750 = $4,250), and the cost of the next twenty ($1,420.50 + $1,225.00 = $2,645.50)

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