Question

Supply chain effects on total relevant inventory cost. Cow Spot Computer Co. outsources the production of motherboards for its computers. It has narrowed down its choice of suppliers to two companies: Maji and Induk. Maji is an older company with a good reputation, while Induk is a newer company with cheaper prices. Given the difference in reputation, 5% of the motherboards will be inspected if they are purchased from Maji, but 25% of the motherboards will be inspected if they are purchased from Induk. The following data refers to costs associated with Maji and Induk.

 

1. What is the relevant cost of purchasing from Maji and Induk?

2. What factors other than cost should Cow Spotconsider?

Answer 1

Supply chain effects on total relevant inventory costs. 

 

1.         

The relevant costs of purchasing from Maji and Induk are:

 

2.       

While Induk will save Cow Spot $6,980 ($935,930 − $928,950), Cow Spot may still choose to use Maji for the following reasons:

a. The savings are less than 1% of the total cost of the mother boards.

b. With ten times the number of returns, Induk will probably have a negative effect on Cow Spot’s reputation.

c. With Induk’s higher stockouts, Cow Spot’s reputation for availability and on time delivery will be effected.

d. The increased number of inspections may necessitate the hiring of additional personnel and the need for additional factory space and equipment.

While Induk will save Cow Spot $6,980 ($935,930 − $928,950), Cow Spot may still choose to use Maji for the following reasons: