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) 4,000 6,500 Plastic discarded 100 520 The purchasing manager has just received bids on an order for 310 tons of plastic from both Tappan and Hill. Tappan bid $1,950 and Hill bid $1,886 per ton.
Required:
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?
b. Assume all else remains the same. What bid by Tappan would make Kinnear indifferent between buying from Tappan or Hill?

Answer 1

Answer:

A. Effective cost is $2000 for tappan, $2050 for hill

B. $1998.75

Explanation:

For tappan

Total tons purchased = 4000

Plastic discarded = 100

Percentage of discarded = 100/4000 x 100 = 2.5%

Percentage of accepted( not discarded) = 100 - 2.5% = 97.5%

Bid price = $1950

Effective cost of Tappan = 1950/97.5% = 1950/0.975 = $2000

For Hill

Total tons purchased = 6500

Plastic discarded = 520

% discarded = 520/6500*100 = 8%

% accepted = 100%-8% = 92%

Bid price = $1886

Effective cost for Hill = 1886/92% = $2050

2. Bid of Tappan/97.5% = $2050

We cross multiply

Bid of Tappan = 2050 x 0.975

= $1998.75

This bid by Tappan would make kinnear indifferent between buying from both

i also solve this in a table format as seen in the atttachment