Kuantan ATV, Inc. assembles five different models of all-terrainvehicles (ATVs) from various ready-made components to serve the LasVegas, Nevada, market. The company uses the same engine for all itsATVs. The purchasing manager, Ms. Jane Kim, needs to choose asupplier for engines for the coming year. Due to the size of thewarehouse and other administrative restrictions, she must order theengines in lot sizes of 1,000 each. The unique characteristics ofthe standardized engine require special tooling to be used duringthe manufacturing process. Kuantan ATV agrees to reimburse thesupplier for the tooling. This is a critical purchase, since latedelivery of engines would disrupt production and cause 50 percentlost sales and 50 percent back orders of the ATVs. Jane hasobtained quotes from two reliable suppliers but needs to know whichsupplier is more cost-effective. The terms of sale are 5/10 net 30for Supplier 1 and 3/10 net 30 for Supplier 2. The data related tothe costs of ownership associated with two reliable suppliers hasbeen collected in the Microsoft Excel Online file below. Open thespreadsheet and perform the required analysis to answer thequestions below.
Questions
1. What is the total cost of ownership for each of thesuppliers? Assume the buyer will take advantage of the largestdiscount. Do not round intermediate calculations. Round youranswers 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 | |
