Reference no: EM13859016
Alphacap, a manufacturer of electronic components, is trying to select a single supplier for the raw materials that go into their main product, the doublecap, a new capacitor that is used by cellular phone manufacturers to protect microprocessors from power spikes. Two companies can provide the necessary materials-MultiChem and Mixemat. MultiChem has a very solid reputation for its products and charges a higher price due to their reliability of supply and delivery.
MultiChem dedicates plant capacity to each customer and therefore supply is assured. This allows MultiChem to charge $1.20 for the raw materials used in each double cap. Mixemat is a small raw materials supplier that has limited capacity.
They charge only $.90 for a unit's worth of raw materials but their reliability of supply is in question. They do not have enough capacity to supply all their customers all the time. This means that orders to Mixemat are not guaranteed. In a year of high demand for raw materials, Mixemat will have 90,000 units available for Alphacap.
In low demand years, all product will be delivered. If Alphacap does not get raw materials from their suppliers, they need to buy them on the spot market to supply their customers. Alphacap relies on one major cell phone manufacturer for the majority of its business and failing to deliver could cause them to lose this contract, essentially putting the firm at risk.
Therefore, Alphacap will buy raw material on the spot market to make up for any shortfall. Spot prices for single-lot purchases (such as Alphacap would need) are $2.00 when raw materials demand is low and $4.00 when demand is high.
Demand in the raw materials market has a 75 percent chance of being high in the market each of the next two years. Alphacap sold 100,000 doublecaps last year and expects to sell 110,000 this year.
However, there is a 25 percent chance they will only sell 100,000. Next year, the demand has a 75 percent chance of rising 20 percent over this year and a 25 percent chance of falling 10 percent.
Alphacap uses a discount rate of 20 percent. Assume all costs are incurred at the beginning of each year (Year l's costs are incurred now and Year 2 costs are incurred in a year) and that Alphacap 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 Alphacap choose? What other information would you like to have to make this decision?