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Supplier competition from stealing business

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Reference no: EM131174278

Can you someone please explain this question for me using two companies as an example?

A rule in a contract, generally one with a commodity supplier, is the take-or pay provision. It is usually used with commodity suppliers that have high fixed cost. As an example, you agree to guy 100 units from a supplier at $80 per unit. If you buy less, you still have to pay $60 for each unit not bought. How does this provision, which essentially turns $60 of variable cost into a fixed cost for you. discourage a supplier's competition from stealing business?

Reference no: EM131174278

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