Intelex is a manufacturer of hard drives and is trying to select a single supplier for circuit boards that go into their main product. Two companies can provide the necessary circuit board — FSX and Raymon. FSX charges a higher price on account of its reliability of supply and delivery. FSX dedicates plant capacity to each customer, ensuring supply. This allows FSX to charge $15 per unit. Raymon is a small supplier with limited capacity that charges only $12 for a unit. The reliability of supply, however, is in question. Raymon may not have enough capacity, and orders to Raymon are not guaranteed. In a year of high demand for circuit boards, Raymon will have at most 90,000 units available for Intelex. In low-demand years, all demand would be satisfied. If Intelex does not get circuit boards from its suppliers, it needs to buy them on the spot market to make up for any shortage. Spot market price is $20 per unit when demand is low and $40 when demand is high. Demand in the circuit board market has a 75% chance of being high each of the next two years. Intelex sold 100,000 hard drives last year and expects to sell 110,000 units this year. However, there is a 25% chance it will sell only 100,000. Next year, the demand has a 75% chance of rising 20% over this year and a 25% chance of falling 10%. Intelex uses a discount rate of 15%. Assume all costs are incurred at the beginning of each year, such that year 1 costs are incurred now and year 2 costs are incurred in a year. Intelex must make a decision with a two-year horizon. Only one supplier can be chosen, as these two suppliers refuse to supply someone who works with their competitor. Which supplier should be chosen?



Answer :

Other Questions