Question

Essay Questions 1. A printer company is currently can produce sales of $10,000,000. The cost of materials are $7,500,000, labor costs are $1,500,000, and overhead costs are $500,000. If the company can implement one of two strategies regarding a particular product: hire a marketing firm to increase sales of 20% or assign a product procurement manager who can reduce materials costs for the product by 6 percent, what are the effects on the net income of the two alternative strategies? And which one is the best option? [15 Marks) 2. In supplier management, under what circumstances should a collaborative supplier relationship be pursued? 17 Marks]

Answer 1

Answer: (1)

Current sale = $10,000,000

Cost of materials = $7,500,000

Labor costs = $1,500,000

Overhead costs = $500,000

Therefore,

Net Income = Current sale – (Cost of materials + Labor costs + Overhead costs)

                      = $10,000,000 - ($7,500,000 + $1,500,000+ $500,000)

                      = $ 10,000,000 – (9,500,000) = $500,000

(a) Strategy 1: Hire a marketing firm to increase sales of 20%.

New sales = $10,000,000 + 20%($10,000,000) = $10,000,000 + $2,000,000 = $12,000,000

Therefore,

Net Income = New sale – (Cost of materials + Labor costs + Overhead costs)

                      = $12,000,000 – ($7,500,000 + $1,500,000 + $500,000)

       = $12,000,000 – ($9,500,000) = $2,500,000

(b) Strategy 2: Assign a product procurement manager who can reduce materials costs for the product by 6%.

New material costs = $7,500,000 – 6%($7,500,000)

                                   = $7,500,000 – 450,000 = $7,050,000

Net Income= Current sale – (New Cost of materials + Labor costs + Overhead costs)

                    = $10,000,000 – ($7,050,000 + $1,500,000 + $500,000)

                    = $10,000,000 – 9,050,000 = $950,000

Since, in strategy 1 the net income is more than the income in the strategy 2.

Therefore, strategy 1 will be the better option.

Answer: (2)

The circumstances under which a collaborative relationship can be pursued are:

· Buying firms prefer a more collaborative relationship when the purchase is deemed strategically important to the buying organization, the market is dynamic and there are few alternatives.

· Collaborative relationships are emphasized by buying firms when the purchase is deemed important to the organization.

· Collaborative relationships are emphasized by buyers when the complexity is high.

· Collaborative relationships are more likely to involve operational linkages and high levels of information exchange.

· Customers prefer a collaborative relationship when there is a competitive supply environment featuring many alternatives.