II. (10 points) Problem Solving:
Total cost of ownership is more than just the purchase – other factors, including freight and
inventory costs, tooling, tariffs and duties, currency exchange fees, payment terms, maintenance,
and all other related costs must be considered. Kuantan ATV, Inc. assembles five different
models of all-terrain vehicles (ATVs) from various ready-made components to serve the Las
Vegas, Nevada market. The company uses the same engine for all its ATV. The purchasing
manager, Ms. Jane Kim, needs to choose a supplier for engines for the coming year. Due to the
size of the warehouse and other administrative restrictions, she must order the engines in lot sizes
of 1000 each. The unique characteristics of the standard engine require special tooling to be
used during the manufacturing process. Kuantan ATV agrees to reimburse the supplier for the
tooling. This is a critical purchase, since late delivery of engines would disrupt production and
cause 50 percent lost sales and 50 percent back orders of the ATVs. Jane has obtained quotes
from two reliable suppliers but needs to know which supplier is more cost-effective. She has the
following information:
Requirements (annual forecast)
12,000 units
Weight per engine
22 pounds
Order processing cost
$125/order
Inventory carry rate
20% per year
Profit margin
18%
Cost of working capital
10%
Price of finished ATV
$4500
Backorder cost
$15 per unit
Two qualified suppliers have submitted the following quotations:
Unit Price
Supplier 1
Supplier 2
1 to 999 unit/order
$510.00
$505.00
1000 to 2999 units/order $500.00
$498.00
3000 + units/order
$490.00
$488.00
Tooling cost
$22,000
$20,000
Terms
2/10, net 30
1/10, net 30
Distance
125 miles
100 miles
Supplier quality rating (defects) 2%
3%
Supplier delivery rating (late deliver)1%
2%
Note: terms of 1/10, net 30 means if the bill is paid within 10 days, there is a 1% discount.
Otherwise, the total amount is due within 30 days. For example, if "$1000 1/10 net 30" is
written on a bill, the buyer can take a 1% discount ($1000 x .01 = $10) and make a payment of
$990 within 10 days, or pay the entire $1000 within 30 days.
Jane also obtained following freights from her carrier:
Truckload (TL 40,000 lbs): $0.80 per ton-mile
Less-than-Truckload (LTL): $1.20 per ton-mile
(Note per ton-mile = 2000 pounds per mile)
a. Compute the total cost ownership for each supplier to include all the costs that should be
considered. (8 points)
b. Briefly indicate which supplier you would like to choose and why. (2 points)
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