# Question & Answer: What is the total cost of ownership for Supplier 2? What is the total cost…..

What is the total cost of ownership for Supplier 2?

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What is the total cost of ownership for Supplier 1?

The Green Machine Manufacturing Company is also trying to decide which of two suppliers to purchase engines from. Green Machine has agreed to cover the tooling cost for the supplier selected. The relevant information is provided below. Carry all calculations out to two decimal places. Order lot size Annual demand Engine weight 2,500 units 120,000 units 10 pounds \$100/order 196 per year cost Inventory carrying rate Supplier 1 Supplier 2 Unit Price 1 to 999 units order Unit Price 1000 to 2999 units order Unit Price 3000+units/order Tooling Cost Distance Supplier defect rate (% of engine cost) S315.00 \$320.00 06.00 S300.00 \$13,500 110 miles 2% \$305.00 5,250 125 miles 1% Truckload (TL 40,000 lbs.): \$1.05 per ton-mile s-than-truckload (LTL): \$1.75 per ton-mile Note: per ton-mile 2,000 pounds per mile

## Expert Answer

Please see below the calculations

 Supplier 1 Supplier 2 (A) Annual Demand 120,000.00 120,000.00 (B) After adjusting for defect rate 122,400.00 121,200.00 (C ) Order lot size 2,500.00 2,500.00 (D) Number of orders (rounding up) (B)/ (C ) 49.00 49.00 (E) Ordering cost (\$100/ order) 4,900.00 4,900.00 (F) Tooling cost 13,500.00 5,250.00 (G) Cost price per order* 773,991.00 783,489.00 (H) Total cost of purchases (first 48 orders) 37,151,568.00 37,607,472.00 (I) Cost of purchases for 49th order 743,391.00 381,789.00 (J) Total cost of purchases (H) + (I) 37,894,959.00 37,989,261.00 (K) Number of engines in 1 truck trip 4,000.00 4,000.00 (L) Number of trips (rounding up) (B)/(K) 31.00 31.00 (M) Cost for first 30 trips (\$1.05 X 20 X distance)** 69,300.00 78,750.00 (N) Cost for next 1 trip (\$1.75 X 20 X distance) 2,310.00 1,312.50 (O) Total transportation cost 71,610.00 80,062.50 (P) Total ordering + purchases + transportation cost (E + F + J + O) 37,984,969.00 38,079,473.50 (Q) 1% inventory carrying cost 379,849.69 380,794.74 Total ownership cost by supplier (P + Q) 38,364,818.69 38,460,268.24

*For Supplier 1 – \$315 cost price per unit for first 999 units and then \$306 cost price per unit for next 1501 units. Vice versa for Supplier 2. Similar calculations for the last (or 49th) order which is 2400 for supplier 1 and 1200 for supplier 2 – this is derived based on the defect rate.

** \$1.05 is the cost for per tonne mile (or 2000 pounds per mile). Truck capacity is 40000 pounds. Hence for each trip we have multipled \$1.05 by 20 (i.e. 40,000/2000)