Question

1. The spreadsheet below estimates the total cost for each supplier. Analyze each of three supplier options and compare their costs to the cost of the U.S. supplier.

2. What additional cost elements for each supplier should Beth consider? Are there other issues besides cost that Beth should evaluate?

3. Consider environmental impact of doing business with each of these suppliers. How does this impact the total cost and your decision-making?

4. Which supplier do you recommend?

5. Looking at your preferred supplier, what suggestions do you have for lowering your total costs?

   China Ukraine (Container) (Container) Netherlands (Container) U.S. (each) Calculations Unit Price Packaging Tooling Inland Transportation $42,000.00 $2,000.00 $100.00 $200.00 $3,000.00 $200.00 $420.00 $120.00 Price * 1000 $1.00 Cost 1000 $0.03 Tooling Cost/Annual Rate of Sale * 1000 $5.20 Stated Stated Stated Ocean Transportation Freight Forwarder Fee Insurance $85,000.00 $1,750.00 $125.00 $200.00 $3,500.00 $100.00 $850.00 $400.00 $250.00 $75.00 $1,500.00 $4,250.00 $500.00 1% * container unit price Brokerage Fee $400.00 Travel $60,000.00 $2,500.00 $75.00 $750.00 $4,500.00 $400.00 $600.00 $400.00 $250.00 $200.00 $1,500.00 $3,000.00 $500.00 $1,500.00 $1,200.00 $1,600.00 $1,800.00 $250.00 Stated (Hedging Currency) ($9000 per year/36000)* 1000 Stated Amount Administrative U.S. Port Handling Charge $150.00 $1,500.00 $2,100.00 Stated Duty 5% * container unit price $500.00 Stated Brokerage 2 Port to Avondale Cost of Capital Warehouse Costs Defect Rate Environmental Surcharge $1,500.00 $840.00 $1,600.00 $2,100.00 $1,500.00 $1,700.00 $1,600.00 Stated [(Annual Rate/12) * (Container Value * 3)]/3 Cubest * 1.00 1000 $850.00 Defect % * 1000 * unit price $500.00 Stated Environmental Surcharge Price for Container Price Each $58,860.00 $58.86 $80,775.00 $80.78 $750.00 Stated $105,400.00 Sum of all costs per containter $105.40 $126.23 Unit Price

6. Imagine your boss asks you to look at a 3-year contract. After some quick analysis, you determine that prices in China and Ukraine will rise even as prices in Netherlands and U.S. decrease (see the following table). You expect this lawn mower to be a big hit with sales increasing as follows:

   Year 1: 36,000 (3,000 per month)

   Year 2: 72,000 (6,000 per month)

   Year 3: 108,000 (9,000 per month)Calculate the net present value (NPV) for each supply option using a 10% cost of capital. Which supplier would you choose now? Why?

Answer 1

1. What additional cost elements for each supplier should Beth consider? Are there other issues besides the cost that Beth should evaluate?

A. In the case of imports, Beth needs to consider the foreign exchange rates available at the time of import with regard to the exporting country. Beth also needs to consider any additional duties imposed on the goods imported. Need to check the quality of the goods and further processing charges if any in case the goods imported are used in another manufacturing process. Cost needs to be incurred for quality inspection are also need to be considered. In case Beth is importing in higher quantity then, storage and maintenance costs are to be taken into consideration. Apart from the cost, as these goods are environmentally hazardous, Beth needs to consider the appropriate ways of utilizing and disposing in case of scrap.

2. Consider the environmental impact of doing business with each of these suppliers. How does this impact the total cost and your decision-making?

A. As there is an environmental impact of doing business, the government may impose additional charges or penalties to import and to produce such products in the country. This will lead to an increase the cost of the product which may directly impact the profitability. If only import regulations are imposed then the cost of import will increase, whereas the local supplies will be continued at lower prices. Then the decision of import may be shifted from import to procure locally. Beth may also need to follow the environmental regulations to protect the environment, which may increase the cost of production.

3. Which supplier do you recommend?

Calculation of Net present value (NPV) for each supply option 1 For China Year Volume Price per unit (in $) Discounting rate @ 10% Cash outflow (Volume X Price per unit) 2118960 4873680 8041680 Present Value (Cash outflow X Discounting rate) 1 926327 4027835 6 041833 36000 72000 108000 58.86 67.69 74.46 0.9091 0.8264 0.7513 3 Total Cashout flow = 11995995 2 For Eastern Europe Year Volume Price per unit (in $) Discounting rate @ 10% Cash outflow (Volume X Price per unit) 2907720 6513840 10552680 Present Value (Cash outflow X Discounting rate) 2643382 5383339 7928385 1 2 3 36000 72000 108000 80.77 90.47 97.71 0.9091 0.8264 0.7513 Total Cashout flow = 15955105 3 For Western Europe Year Volume Price per unit (in $) Discounting rate @ 10% Cash outflow (Volume X Price per unit) 3794400 7430400 10932840 Present Value (Cash outflow X Discounting rate) 3449455 6 140826 8214005 1 2 36000 72000 108000 105.40 103.20 101.23 0.9091 0.8264 0.7513 3 Total Cashout flow = 17804285 4 For United States Year Volume Price per unit (in $) Discounting rate @ 10% Cash outflow (Volume X Price per unit) 4544280 8634240 12692160 Present Value (Cash outflow X Discounting rate) 4131164 7135736 9535808 1 2 3 36000 72000 108000 126.23 119.92 117.52 0.9091 0.8264 0.7513 Total Cashout flow = 20802707 Supplier from China is to be selected as the total cost is less in that option. Even though the price is increasing year by year, the total cost is lower in that option