Question

Dusty is evaluating two bids to supply fence hardware for the 5 acres of pasture that need to be fenced. breezy submits a bid of​ $40 per unit with a defect rate of​ 3%, and lady's bid is​ $50 per unit with a defect rate of​ 0.5%. if a section of fence​ fails, it costs an average of​ $500 in losses and herding costs to round up all of the capybaras. dusty believes it will take 500 units to fence in this pasture​ configuration; which supplier should win the​ business?

Answer 1

Let us see it from a cost-efficiency point of view. We have that every unit of the first selles costs 40$. But the total cost might be higher, since there is a chance for defect. On average, on 3% of the cases the defect will happen and it will cost him 500$. Hence, on average, a fence unit from producer a costs 40$ and has a repair cost of 3%*500$=15$. The total thus is 55$. For the second provider of fences, the standard cost is 50$. Similarly, the average repair cost is 0,5%*500$=2,5$. Hence, the total cost per unit is 52,5$ (total cost=upfront payment+repair costs). We see thus that the lady should win the bid; even if you pay more upfront, the difference in durability makes up the cost difference.

Answer 2

Dusty believes it will take 500 units to fence in this pasture​ configuration; and the supplier that should win the​ business is the lady.