A company has the option to procure a particular material from two sources: Source I assures that defectives will not be more than 2% of supplied quantity. Source II does not give any assurance, but on the basis of past experience of supplies received from it, it is observed that defective percentage is 2.8%. The material is supplied in lots of 1,000 units. Source II supplies the lot at a price, which is lower by 100 as compared to Source I. The defective units of material can be rectified for use at a cost of 5 per unit. You are required to find out which of the two sources is more economical.

A company has the option to procure a particular material from two sources: Source I assures that defectives will not be more than 2% of supplied quantity. Source II does not give any assurance, but on the basis of past experience of supplies received from it, it is observed that defective percentage is 2.8%. The material is supplied in lots of 1,000 units. Source II supplies the lot at a price, which is lower by 100 as compared to Source I. The defective units of material can be rectified for use at a cost of 5 per unit. You are required to find out which of the two sources is more economical.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter17: Making Decisions With Uncertainty

Section: Chapter Questions

Problem 1MC

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