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)	7,000	10,000
Plastic discarded	175	500

The purchasing manager has just received bids on an order for 220 tons of plastic from both Tappan and Hill. Tappan bid $1,755 and Hill bid $1,729 per ton.

Required:

1. 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.)

2. 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) First lets calculate the percentage of plastic discarded from Tappan and Hill

Tappan = 175*100/7000 = 2.5%

Hill = 500*100/10000 = 5%

2) Calculate effective rate per kg of the plastic

Tappan: Total quantity received after wastage = 1000-(1000*2.5%) = 975Kgs

Cost Per Kg = 1755/975 = $1.8 per KG

Effective cost per Ton = 1000*1.8 = $1800

Hill: Total Quantity received after wastage = 1000-(1000*5%) = 950 Kgs

Cost per Kg = 1729/950 = $1.82 per Kg

Effective Cost per Ton = 1000*1.82 = $1820

2)

If the effective price per Kg of Tappan would be Rs.1.82 Kg then it would be indifferent thus we could say that Quote of $1774.5 (975*1.82) will be the answer