Use the following information to determine which supplier is more cost-effective using total cost analysis. Note: Late delivery of components would cause 50% lost sales and 50% back orders of finished goods. Order lot size 500 Annual Requirements 6,000 units Weight per steering wheel 20 pounds Order processing cost $125 Inventory carrying rate 20% per year Cost of working capital 10% per year Profit margin 20% Price of finished golf cart $5,000 Back order cost $15 per unit Unit Price Supplier 1 Supplier 2
1 to 999 units/order $50 $49.50
1000 to 2,999 units/order $49 $48.50
Tooling cost $1000 $1000
Terms 2/10 net 30 1/10 net 30
Distance 120 miles 100 miles
Supplier Quality Rating 2% 3%
Supplier Delivery Rating 1% 2%
Truckload (TL z 413,000 lbs): $0.90 per ton-mile
Truckload Less-than-truckload (LTL): $1.10 per ton-mile
Note: per ton-mile = 2,000 lbs. per mile; number of days per year = 365
a. Using Supplier 2 will save about $20,000
b. Using Supplier 1 will save about 534,000
c. Using Supplier 1 will save about $41,000
d. Using Supplier 2 will save about $30,000