Question

Plexicorp, LLC manufactures specialized emergency pilings used when uncommonly strong weather events damage or destroy commercial docks. The key component in these pilings, transparent aluminum, is sourced from Doohan Engineering based on renewable 5-year contracts.
a. Describe a circumstance that might lead to Plexicorp electing to not renew the contract when it expires, instead purchasing the component in spot-exchanges.
b. Describe a circumstance that might lead to Plexicorp electing to negotiate a 10-year contract with DE.
c. Describe a circumstance that might lead to Plexicorp acquiring DE for the purpose of sourcing its component in-house.
d. Illustrate one of the above with a relevant graph.

Answer 1

Solution A

Plexicorp may not renew contract if spot exchange prices are lower than contract prices. This will maximise its profits and help bulk purchases in advance to take maximum benefit  

Solution B

Plexicorp can renew or negotiate longterm contract of 10 years when spot exchange rate is high however due to long term contract the spare parts will be purchased at much lower cost and thereby DE shall get assured volumes of production for next 10years.

Solution C

Plexicorp can tend to acquire DE is supply of such pilings is limited or DE becomes sole supplier who manufactures pilings. This becomes case of vertical integration.

Solution D

Vertical integration occurs when complexity and performance of target firm is at its peak as shown below.

answered by: anonymous