Question

Kuantan ATV, Inc. assembles five different models of all-terrain vehicles (ATVs) from various ready-made components to serve the Las Vegas, Nevada, market. The company uses the same engine for all its ATVs. The purchasing manager, Ms. Jane Kim, needs to choose a supplier for engines for the coming year. Due to the size of the warehouse and other administrative restrictions, she must order the engines in lot sizes of 1,000 each. The unique characteristics of the standardized engine require special tooling to be used during the manufacturing process. Kuantan ATV agrees to reimburse the supplier for the tooling. This is a critical purchase, since late delivery of engines would disrupt production and cause 50 percent lost sales and 50 percent back orders of the ATVs. Jane has obtained quotes from two reliable suppliers but needs to know which supplier is more cost-effective. The terms of sale are 5/10 net 30 for Supplier 1 and 3/10 net 30 for Supplier 2. The data related to the costs of ownership associated with two reliable suppliers has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Questions

1. What is the total cost of ownership for each of the suppliers? Assume the buyer will take advantage of the largest discount. Do not round intermediate calculations. Round your answers to the nearest cent.

	Supplier 1	Supplier 2
Total	$	$

2. Which supplier is more cost-effective?

Total Cost of Ownership Analysis
			Unit Price	Supplier 1	Supplier 2
Requirements (annual forecast units)	14,000		1 to 999 units per order	$530.00	$520.00
Lot size (Q)	1,000		1000 to 2999 units per order	$520.00	$515.00
Weight per engine (lbs)	29		3000+ units per order	$510.00	$506.00
Order processing cost (per order)	$125.00		Tooling cost	$25,000	$22,000
Inventory carrying rate (per year)	24%		Terms (net 30)	5%	3%
Cost of working capital (per year)	5%		Distance (miles)	140	100
Profit margin	20%		Supplier Quality Rating (defects)	3%	2%
Price of finished ATV	$5,000		Supplier Delivery Rating (lateness)	2%	3%
Back-order cost (per unit)	$19.00
Back-order lost sales	50%			Supplier 1	Supplier 2		Formulas
Late delivery lost sales	50%		Total engine cost				#N/A	#N/A
			Cash discount (net 30)				#N/A	#N/A
Other Information			Cash discount (early payment)				#N/A	#N/A
Truckload (TL>=40,000 lbs)	$0.60	per ton-mile	Tooling cost				#N/A	#N/A
Less-than-truckload (LTL)	$1.20	per ton-mile	Transportation cost				#N/A	#N/A
Per ton-mile	2,000	lbs per mile	Ordering cost				#N/A	#N/A
Days per year	365		Carrying cost				#N/A	#N/A
Invoice payment period (days)	30		Quality cost				#N/A	#N/A
Discount period (days)	10		Backorder cost				#N/A	#N/A
			Lost sales cost				#N/A	#N/A
			Total cost				#N/A	#N/A
			Lowest cost				#N/A

Answer 1

Order Quantity / Lot size (Q) = 1000 units

Annual Demand (D) = 14,000 units

Weight per engine (e) = 29 lbs

Ordering cost per order (O) = $125

Carrying cost rate (c) = 24%

Cost of working capital (cw) = 5%

Profit margin = 20%

Price of finished ATV = $5,000

Back-order cost = $19

Late Deliveries:

Back order lost sales = 50%

Late Delivery lost sales = 50%

Suppliers 1 Suppliers 2

1	530	520
1000	520	515
3000	510	506
Tooling cost	$25000	$22000
Terms net (30)	5%	3%
Distance (x)	140 miles	100 miles
Supplier defect rating (% of engine cost) (qr)	3%	2%
Supplier delivery rating (dr)	2%	3%

Full Truck Load (FTL) = 40,000 lbs

Truckload (TL >= 40000 lbs): $ per ton-mile = $ 0.60 per ton-mile

Less-than-Truckload (LTL): $ perr ton-mile = $1.20 per ton-mile

(Note: Per ton-mile = pounds per mile) = 2000 lbs per mile

Days per year = 365 days

Invoice payment period (days) = 30

Discount period (days) = 10

Total shipment weight (W) = Q*e = 29000 lbs

Applicable freight rate per 2000 lb per mile (f) = 1.2

		Supplier 1	Supplier 2
	Applicable unit price (p)	520	515
A	Total engine cost = D*P	7,280,000	7,210,000
B	Cash discount (net 30)	-(7,280,000*30*0.05)/365 =-29918	-(7,210,000*30*0.05)/365 =-29630
C	Cash discount (early payment)	-7,280,000(0.05+0.05*10/365) = -373,973	-7,210,000(0.03+0.05*10/365) = -226,177
D	Tooling cost	$25,000	$22,000
E	Transportation cost = (D*e*X*f)/2000	(14000*29*140*1.2)/2000 = 34104	(14000*29*100*1.2)/2000 = 24360
F	Ordering cost = (D/Q)*O	1750	1750
G	Carrying cost = (Q/2)*p*c	62,400	61800
H	Quality Cost = D*p*qr	218,400	144,200
I	Back order cost	14000*19*0.5*0.02 = 2,660	14000*19*0.5*0.03 = 3,990
J	Lost sales cost	14000*0.2*5000*0.5*0.02 = 140,000	14000*0.2*5000*0.5*0.03 = 210,000
	Total cost	Sum(A to J) = 7,360,423	Sum of (A to J) = 7,422,293

1)

Supplier 1 = $7,360,423

Suppler 2 = $7,422,293

2)

Total cost of supplier 1 is less cost. So, supplier 1 is recommended.