Your company assembles five different models of a motor scooter that is sold in specialty stores in the United States. The company uses the same engine for all five models. You have been given the assignment of choosing a supplier for these engines for the coming year. Due to the size of your warehouse and other administrative restrictions, you must order the engines in lot sizes of 1,250 each. Because of the unique characteristics of the engine, special tooling is needed during the manufacturing process which you agree to reimburse the supplier. Your assistant has obtained quotes from two reliable engine suppliers and you need to decide which to use. The following data has been collected:
Requirements (annual forecast) 20,000 units
Weight per engine 30 pounds
Order processing cost $110 per order
Inventory carry cost 25 percent of the average value of inventory per year
Note: Assume that half of lot size is in inventory on average (1,250/2 = 625 units).
Two qualified suppliers have submitted the following quotations:
Unit Price Supplier 1 Supplier 2
1 to 999 units/order $ 513.00 $ 520.00
1,000 to 2,999 units/order 501.00 506.00
3,000 + units/order 487.00 499.00
Tooling costs $ 23,000 $ 18,000
Distance 125 miles 110 miles
Your assistant has obtained the following freight rates from your carrier:
Truckload (45,000 each load): $0.90 per ton-mile
Less-than-truckload: $1.40 per ton-mile
Note: Per ton-mile = 2,000 lbs. per mile
(a) Calculate the total cost for each supplier.
(b) If you could move the lot size up to ship in truckload quantities, calculate the total cost for each supplier.