You are the Supply Manager for a US electronics manufacturer. The normal deliver

Question

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: 1. 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 $ _______________

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

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

Solution Working capital= 10,000*1.385= $13,850 2.4mil units*1.385= $3,324,000 After 22% Discount: 3,324,000*.22= $2,592,720 Amount need to borrow: 2,592,720-13,850=$2,578,870

1. Total Annual Cost: Interest on loan: 2,578,870*(1+0.06125)=$2,736,925.79 In and out handling: 2,400,000/10,000 (unit each day)= 240 pallets/year 240*88=$21,120 Storage: 2400/12=200 pallets/month?decrease 200 storage each month 5*2400=$12,000 (first month) 2*2200=$11,000 (second month) etc. Storage/year: 12,000+11,000+10,000+9,000…+1,000=$66,000 Insurance: $13,300 (given) Transportation: 10*66=$660/day $6600*20*12=$158,400/ year Damage/loss: 0.015*2,736,825.79=$41,052.39 Total Annual Cost: 2,736,925.79+21,120+66,000+13,300+660+158,500+41,052.39= $3,036,698.18

2. Annual dollar amount of the discount: 13,850*240=$3,324,000

3. 3,324,000-3,036,698.18= $287,301.82 I would accept the offer because I’m making a profit on the total cost for a year.

Can anyone help solve this problem? I posted the solution of my calculation but my professor said its all incorrect, therefore, I'm not sure whether there's a little mistake or I did it all wrong.

Explanation / Answer

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

generation plan is for 20 days/month; 240 working days/year

provider offers to you a 22% value markdown, in the event that you take conveyance of 2,400,000 units in a solitary request.

current conveyed cost of parts = $1.385 per unit; 6.125% yearly intrigue; one-time installment of standard and enthusiasm toward the finish of 1 year

Each delivery container contains 25 parts

Every bed of parts contains 40 cartons

In and out dealing with charges = $8.80 per pallet

Capacity every month perpallet = $5.00 (not all pallet are put away for the whole a year; the stock decays)

Insurance on the parts stock is $13,300 every year (settled)

Transportation charges from outside capacity to your manufacturing plant @ $66.00 per pallet(10,000 part for each day)

1.5% of the estimation of the whole buy as the harm/misfortune 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 transportation container contains 25 sections and every bed of parts contains 40 containers, in this way one bed conveys 25*40=1000 units, which implies we require 10 beds ordinary for 10,000 units to be conveyed.

Every bed costs $8.80, which implies we cost $88 for 10 beds regular and 240* 88= $ 21,120 for entire year and 2.4 million parts...........(3)

capacity cost for 1 bed is $ 5 every month, so for the first month the capacity cost = 5*2400=$ 12,000

Accepting equivalent number of beds escape the capacity say, 2400/12=200pallets consistently ( or 10 beds for 10000 sections for 20 days multi month = 20*10=200)

in this manner the following month the capacity cost for 2200 beds = 5 * 2200 =$ 11,000

Additionally the capacity cost for the whole year = 12000+11000+10000+9000....+1000= $ 66,000...........(4)

Protection on the parts stock is $13,300.................(5)

Transportation cost is $ 66 for every bed, since day by day we tranport 10 beds we cost 10*66=$ 660 every day, since we have 20 working days for every month, so for multi year the transportation cost will be = $660*20days every month * a year = $ 158,400...........(6)

harm/misfortune factor for the year = 1.5% of the buy esteem =0.015* 2,736,825.79 = $ 41,052.39....(7)

Accordingly the aggregate cost for multi year, on the off chance that we pick the #2 alternative of acquiring 2.4 million units on rebate

= (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 choice the cost for the aggregate 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.

thank you.

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