Question

A car assembly company ASSEMCO is legally obligated by a contract to buy 25 engines from ENGCO at the end of two years at a price of $5000 per engine. Accordingly, ASSEMCO started assembling cars that Öt ENGCO engines. In the second year, due to some events in the car manufacturing industry, ENGCO decides to increase the price of their engines, or otherwise it will go bankrupt. What should the manager of ASSEMCO do in this case? How could this problem have been avoided? Did the manager choose the wrong method of procuring inputs?

Answer 1

A car assembly company ASEEMCO has a contract to buy 25 engines from ENGCO. The situation in the car industry has actually turned unfavorable and ENGCO has raised the rate of its engines since it would deal with personal bankruptcy if it has actually not raised the rate. Now, ASEEMCO remains in a difficult situation as it will have bear a greater cost which will increase its production cost.

The essential aspect is the contract here which mentions that ASEEMCO has actually been obliged to purchase 25 engines from the ENGCO but the price factor has actually not been mentioned. It is not uncommon to raise the price if there is a rise in input expense or some inescapable supply shock affecting the entire market. If the issue in the business is since of its internal management inefficiency then it is entirely incorrect to pass the burden of the cost onto the consumer.

ASEEMCO needs to have included the rate in the agreement and if it has not then it should work out for the lower rate with ENGCO. As mentioned above if the issue is because of the mismanagement then ASEEMCO needs to decline the greater price. The company should consist of rate provisions henceforth in the agreement thinking about the factors such as inflation and volume.