In: Accounting
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Sound-Around Turntables (SAT) is a regional manufacturer of high fidelity turntables. It has been in business in Detroit, Michigan since 2008 and has steadily increased sales volume as U.S. sales of vinyl albums re-ignited.
Robert Ritchie, CEO for SAT received an order for 2,500 turntables for Best Buy, a national electronics retailer. Production for this order will begin in late March and the customer order must be delivered on June 1. Since SAT builds to order, Ritchie needs to begin ordering parts from his global supply base soon.
An important needed component is the turntable motor that is normally purchased from Dongguan Electric. The supplier is located in Kaohsiung City, Taiwan. The product is high quality and SAT has worked with Dongguan for 7 years. All units in the order would be shipped at one time. However, the company recently raised its prices citing higher material costs due to rising tariffs.
Last week, Ritchie received a proposal from an Argentinian company that wants to become a supplier to SAT. Maduro Motors promises to make monthly deliveries of 500 units starting on December 15. Ritchie likes the idea of reducing the supplier-to-factory distance and receiving monthly deliveries. However, Ritchie doesn’t know much about this supplier or the political environment in Argentina.
The Options
Dongguan Electric currently sells the 20W synchronous motor to SAT for 825 TWD per unit. Order cycle time is 46 days. Terms are listed as DAT, Chicago Tradeport.
Maduro Motor proposes to sell a similar 20W electric motor to SAT for 875 ARS per unit. Order cycle time is 18 days. Terms are listed as FAS, Port of Mar del Plata.
Dongguan |
Maduro |
|
Price Per Unit |
825 TWD |
875 ARS |
Estimated Ocean Shipping Cost per unit |
140 TWD |
78 ARS |
Estimated US Customs duty per unit |
39 TWD |
12 ARS |
Exchange Rates
Date |
Taiwan New Dollar (TWD) |
Argentine Peso (ARS) |
January 11, 201x |
30.75 |
29.88 |
Answer the following questions:
1. Evaluate the selling price and related costs per unit offered by each supplier in US dollars.
Dongguan |
Maduro |
|
Price Per Unit |
$ |
$ |
Estimated Ocean Shipping Cost per unit |
$ |
$ |
Estimated US Customs duty per unit |
$ |
$ |
2 a. What costs, responsibilities and risks are assumed by the buyer (SAT) and the seller (Dongguan Electric) under Incoterms 2010, DAT, Chicago Tradeport?
b. What costs, responsibilities and risks are assumed by the buyer (SAT) and the seller (Maduro Motor) under Incoterms 2010, FAS, Port of Mar del Plata?
DAT, Chicago Tradeport |
FAS, Port of Mar del Plata |
|
Packaging goods for export and loading the container |
||
Factory to port transportation |
||
Payment of export duties (if any are due) |
||
Loading the container on the ship |
||
Paying for the ocean transport (carriage charges) |
||
Paying for the insurance on the international voyage |
||
Paying destination terminal charges for unloading freight |
||
Clearing US Customs (pay import duties & taxes) |
||
US transportation to final destination |
3. Given your responses to Questions 1 and 2, what is the total known cost per motor that SAT will incur and what other costs will SAT incur?
Dongguan |
Maduro |
|
Costs from Q1 paid by SAT |
$ |
$ |
Costs from Q2 that SAT will incur |
||
Which supplier do you believe will provide the lowest total cost per unit? |
□ Dongguan |
□ Maduro |
4. What other costs and factors would you consider during the supplier selection process?
5. Which global supplier would you select? Why?
Price per unit in US dollar for Dongguan Supply | $26.83 | (825/30.75) | 26.82927 | ||
Price per unit in US dollar for Maduro Supply | $29.28 | (875/29.88) | 29.2838 | ||
Estimated Ocean Shipping Cost (Dongguan) | $4.55 | (140/30.75) | 4.552846 | ||
Estimated Ocean Shipping Cost (Maduro) | $2.61 | (78/29.88) | 2.610442 | ||
Estimated US custom duty (Dongguan) | $1.27 | (39/30.75) | 1.268293 | ||
Estimated US custom duty (Maduro) | $0.40 | (12/29.88) | 0.401606 | ||
Maduro | |||||
Dongguan | |||||
Price Per Unit | $26.83 | $29.28 | |||
Estimated Ocean Shipping Cost per unit | $4.55 | $2.61 | |||
Estimated US Customs duty per unit | $1.27 | $0.40 | |||
DAT, Chicago Tradeport | FAS, Port of Mar del Plata | ||||
Packaging goods for export and loading the container | Dongguan | Maduro | |||
Factory to port transportation | Dongguan | Maduro | |||
Payment of export duties (if any are due) | Dongguan | Maduro | |||
Loading the container on the ship | Dongguan | SAT | |||
Paying for the ocean transport (carriage charges) | Dongguan | SAT | |||
Paying for the insurance on the international voyage | Dongguan | SAT | |||
Paying destination terminal charges for unloading freight | Dongguan | SAT | |||
Clearing US Customs (pay import duties & taxes) | SAT | SAT | |||
US transportation to final destination | SAT | SAT | |||
Maduro | |||||
Dongguan | |||||
Costs from Q1 paid by SAT | $26.83 | $29.28 | |||
Costs from Q2 that SAT will incur | $1.27 | $3.01 | (2.61+0.40) | ||
Which supplier do you believe will provide the lowest total cost per unit? | $28.10 | $32.29 | |||
Dongguan wiilProvide Lowest Cost per Unit | |||||
4 | Other costs and factors: | ||||
Qualty | |||||
Service and Warranty | |||||
Reliability of delivery | |||||
Cost of Carrying Inventory | |||||
5 | Selected supplier : Dongguan | ||||
Considering Lower cost and reliable delivery | |||||
However,inventory carrying cost is higher for Dongguan | |||||