Question

Roscoe Construction Company (RCC) is a company specializing in building roads and highways. As a part of its business, it receives supplies of aggregate from two suppliers: Toorak Gravel (TG) and Kilda Corporation (KC). RCC purchasing has expressed a preference for KC based on price, but occasionally has to order from TG when KC cannot fill the order.

RCC has recently had problems with the quality and the timeliness of deliveries. When a supplier delivers a load to RCC, it goes through an initial inspection to assure it meets specification. If the load fails the initial inspection, it goes through a secondary inspection to determine the exact issue. Almost always, the issue can be resolved and the load can be used. The initial inspection costs $1,000 per load. A secondary inspection, which is more thorough, costs $5,000 per load. If a delivery is delayed, RCC has to hire temporary workers or pay overtime to some employees. The average cost of a delayed load is $2,000.

The following are summary statistics from last year's purchases from the two suppliers.

	Toorak Gravel			Kilda Corp.
Number of loads		100			400
Average tons per load		10,000			5,000
Average price per ton	$	6.00		$	5.90
Number of initial inspections passed		94			300
Number of delayed deliveries		10			80

The sales manager of Kilda Corporation has proposed to the purchasing manager at RCC that KC be given an exclusive contract to supply the aggregate. Assume that the total annual demand remains the same. If it receives the contract, KC will deliver the aggregate in the same average-sized load as it does currently.

Required:

a. If KC receives the exclusive contract, assume the load quality and delivery timeliness will remain the same as current experience. What is the maximum price RCC should offer KC for the exclusive contract? (Round your final answer to 2 decimal places.)

b. Suppose KC guarantees that no deliveries will be delayed or it will repay RCC for the costs associated with the delays. What is the maximum price RCC should offer KC for the exclusive contract? (Round your final answer to 2 decimal places.)

Answer 1

Annual demand matual by Rcc (lopoo x 100)+ (fo00 X400) 3000, o00 tono Loaols to be Suppled by Alo KC caar kc recuves uthe excluawe conaact 5 oU0 600 leado Coot o RCC unitial load does nol bass $5 000 ber load Jnpectian uinepecuan acalayos initial $1000 pe Cost load Qoadt $2000 Avnage cont load per Now, Let us calculate the annual ceol matenal to RCC Bem Pron the Alatistics the last purchooes from TG Jotas Annual Ceat qMateuiae Cost Ceat + frorh kc of purchases Matral Ceat + Sritual uinhectasin cestt Sapectuon Ceat + dletiveris Coat Seondary Cest for

Coat o PuschaA fbn TG (r0e CLIOB-4)5 o(16 x $2009 )+(160 xo)+ x 1000D $6000poo+$100000 + $30,o co t 20,000 $6,150, 000 Coat Puschases 4 00 5000 x 5-) + (400 x1000) t rom kc CA50-3e0) x50 c+8o x$2000 X S1,800, ooD t $400, ooo t $500, 000t $160, 000 12,860, 00D Tolal nnual Cont $6,150, 600 +$12,860, 00u maiual 19,010, 000 RCC i be udady aythe that uts Th uimbluis cthat maximum price to ke Auch Tlelal vcoat Last the the total vcovt exceeds not does purchaors.

loado to beSuppluid No 600 Loadlo Sy kc the cluwry (eatcwtated Prewiualiy Peseentage f uinalial unapection pasing 360 x 1e0 400 ie Peseonbrye atelays valalivesies 80 a100 400 de 207 Por the Cunent loads us dhe number and dhe 600 inapeEluor pacsiny eseantage and ALlvuaipe timelinis hemainsRe Name , then inilial unspeilse pasin 600r 15 No in Cusent 450 No oelayeal claiveuis un cwwant eR 6000x 20/ 120 be otfered oice to be Let (a) the marimum KC ay RCc to The feromed wil quation as maluial VOtal coot Hotal cout laer malwal Currant

ario 19,010, 060-6eo x 5c0o x +[600 x 110ce+ [(Ger- 450) x 450+[20 x 4200] $ 19,010, 000 2 600,000 + COD X $ 150, cCD t$240,00 $19,010, 600 $ xt1590.600 ,c0o, c00 X + $19,010,000 $1,590, 000 $14,420, 000 X 11,420, 000 3,000, 000 $5.80666 $ 5.81 e x Jhira fere, dhe maximum brice RCc hould 1 encluave cenaad s 5.81 ber tan. fer kc

alelaynd alut vos e compenoatie holelivesues the maximum (b) C guarantie no asucciatid ith be prce akould the maximum brics Let be The equalion ia: Jota coat To tal vcoat Cuorent matual matnas in laat NJ +CGo0r41o00 [(Gco-45) x5006 +o 19,010, 000 x5000 x $19,010, 000 + $600,000+150,000 600 X 19,010,600 $1,350, 000 X 3,000, 600 x $17,669 000 3,0 00, 000 y5.88 $5.89 te Thune fores pia hat RCC houtd dlelayed valeliver ws $5 89 ber ten dthe mmanimum kc no