1.Ajax Factory Automation Co – vendor selection Ajax makes a variety of systems
ID: 444574 • Letter: 1
Question
1.Ajax Factory Automation Co – vendor selection
Ajax makes a variety of systems used in automating production lines for small consumer electronics items. The company is considering proposals from two vendors for supplying its motor control units.
Vendor A has proposed a straight price of $25 per unit. Vendor B has proposed a slightly different form of a deal wherein Ajax would pay them a retainer fee of $10,000 per year independent of volume, but would charge Ajax a price of only $15 per motor purchased. The purchasing manager at Ajax is intrigued by the lower price, but is concerned about signing up for the fixed retainer fee.
Show the equations for total cost versus volume for the two alternatives. At what volume are the two alternatives equal cost? What advice would you give the purchasing manager?
Explanation / Answer
Let the volume be "x" units of the motor.
costs in case of vendor A = price per unit*number of units = $25*x = 25x
costs in case of vendor B = retainer fee+(price per unit*number of units) = $10,000+($15*x) = $10,000+15x
volumes at which the costs will be equal:
25x = 10,000+15x
10x = 10,000
or x = 1,000 units.
Thus at 1,000 units, costs for Vendor A and B will be equal.
if units requirements are less than 1,000 vendor A should be selected. However, if the units required are more than 1,000 units vendor B will give a lower cost.
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