A manufacturer purchases 5000 cases of a certain component for $100 per case fro
ID: 433702 • Letter: A
Question
A manufacturer purchases 5000 cases of a certain component for $100 per case from two suppliers: Supplier A and Supplier B. Supplier A is currently responsible for 1/2 of the total demand. The two suppliers currently pay $4 per case for transportation and achieve the same average delivery time of 10 days. However, for each day that a supplier can reduce in the average delivery time, the manufacturer is willing to shift 2% of its total purchase to the supplier offering the premium service. A supplier earns a margin of 20% of the selling price on each case before transportation cost kicks in. The transportation rate increases by $0.5 per case for each day reduced in the average delivery time. What is the total profit of Supplier A when 2 days are reduced in its average delivery time? Assume that Supplier B takes no action.
$40,500
$41,850
$51,000
$ 52,500
$40,500
$41,850
$51,000
$ 52,500
Explanation / Answer
Number of cases currently supplied by A = 2500
Percentage of total purchase shifted to A from B = 2%*2 = 4%
Number of extra cases for A = 4% of 5000 = 200
Total cases for A = 2500+200 = 2700
Margin before transportation = 20%
Selling price per case = $100
Total margin before transportation costs = 2700*100*20% = $54000
Increase in transportation cost = 0.5*2 = $1
New transportation cost per case = 4+1 = $5
Total transportation cost = 2700*5 = $13500
Total profit of supplier A = Total Margin - Total Transportation cost
= $54000 - $13500 = -$40500
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