Question

Kinnear Plastics manufactures various components for the aircraft and marine industry. Kinnear buys plastic from two vendors: Tappan Corporation and Hill Enterprises. Kinnear chooses the vendor based on price. Once the plastic is received, it is inspected to ensure that it is suitable for production. Plastic that is deemed unsuitable is disposed of.

The controller at Kinnear collected the following information on purchases for the past year:

                                     Tappan     Hill
Total purchases (tons) 4,500        7,500
Plastic discarded          135           375

The purchasing manager has just received bids on an order for 260 tons of plastic from both Tappan and Hill. Tappan bid $1,649 and Hill bid $1,634 per ton.

Required: 1-a. Assume that the average quality, measured by the amounts discarded from the two companies, will continue as in the past. What is the effective cost per ton for both Tappan and Hill? (Do not round intermediate calculations.)

1-b. Assume all else remains the same. What bid by Tappan would make Kinnear indifferent between buying from Tappan or Hill? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

1-a)

	Tappan	hill
Total purchase	4500	7500
Plastic discarded	135	375
Percentage of discarded product	3%	5%
Percentage of good quality product (a)	97%	95%
Quoted price (b)	$1649	$1634
Effective cost per ton (a/b)	$1700	$1720

.

1-b)

Bid price by tappan/percentage of good quality product of tappan = effective cost per ton oh hill

= X/97% = 1720

Hence bid price = $1668.4

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