ElegantWood is a manufacturer of modern style furniture and accessories. It considers two online suppliers to purchase its main raw material wood. Both online suppliers provide a similar price and shipping rate. Their service levels and lead times are also similar. However, they have a quite different charging structures. The first online supplier charges 5 percent commission on the market price of wood while the second online supplier requires a subscription fee of $10 million as an up-front payment for a 2-year period. The second online supplie also charges a commission of 1 percent on the market price of wood. Even though ElegantWood spends about $150 million on the purchase of wood each year, this amount varies depending on utilization. Production manager thinks that the next year's utilization will potentially be high and keep the wood spending at $150 million level. However, he also predicts that there is a 25 percent chance that the spending will drop by 10 percent. For the second year, he assumes that the spending level will stay where it was in the first year with a
ElegantWood is a manufacturer of modern style furniture and accessories. It considers two online suppliers to purchase its main raw material wood. Both online suppliers provide a similar price and shipping rate. Their service levels and lead times are also similar. However, they have a quite different charging structures. The first online supplier charges 5 percent commission on the market price of wood while the second online supplier requires a subscription fee of $10 million as an up-front payment for a 2-year period. The second online supplie also charges a commission of 1 percent on the market price of wood. Even though ElegantWood spends about $150 million on the purchase of wood each year, this amount varies depending on utilization. Production manager thinks that the next year's utilization will potentially be high and keep the wood spending at $150 million level. However, he also predicts that there is a 25 percent chance that the spending will drop by 10 percent. For the second year, he assumes that the spending level will stay where it was in the first year with a
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter18: Pricing And Profitability Analysis
Section: Chapter Questions
Problem 14E: Many different businesses employ markup on cost to arrive at a price. For each of the following...
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