# Total Cost of Ownership Analysis for Kuantan ATV, Inc. Let's break down the analysis using the data from your spreadsheet and the scenario details. --- ## **Key Data Recap** ### **Annual Requirements** - **Annual forecast:** 15,000 engines - **Lot size (Q):** 1,000 per order ### **Engine Cost (per unit)** | Quantity | Supplier 1 | Supplier 2 | |-------------|------------|------------| | 1-999 | $520 | $515 | | 1,000-2,999 | $510 | $508 | | 3,000+ | $500 | $498 | ### **Other Costs** - Tooling cost: $23,000 (Supplier 1), $20,000 (Supplier 2) - Ordering cost per order: $150 - Inventory carrying rate: 20% - Cost of working capital per year: 15% - Price of finished ATV: $5,000 - Back-order cost per unit: $19 - Back-order lost sales: 50% - Late delivery lost sales: 50% - Profit margin: 22% - Defective rate: 1% (Supplier 1), 2% (Supplier 2) - Late delivery rate: 1% (Supplier 1), 2% (Supplier 2) ### **Transportation Costs** - Truckload: $.60 per ton-mile - Less-than-truckload: $1.30 per ton-mile - Package: $2 per lb-mile ### **Payment Terms** | Supplier | Discount/Net | Discount % | Discount period | Net period | |-------------|--------------|------------|----------------|------------| | Supplier 1 | 4/10, net 30 | 4% | 10 days | 30 days | | Supplier 2 | 2/10, net 30 | 2% | 10 days | 30 days | --- ## **Step-by-Step Calculations** ### 1. **Total Engine Cost** Since the annual requirement is 15,000 units: - All units qualify for the **3,000+ price**. | Supplier | Unit Price | Annual Cost (15,000 units) | |-----------|------------|----------------------------| | Supplier 1| $500 | $7,500,000 | | Supplier 2| $498 | $7,470,000 | ### 2. **Cash Discount** - **Supplier 1:** 4% of $7,500,000 = **$300,000** - **Supplier 2:** 2% of $7,470,000 = **$149,400** ### 3. **Tooling Cost (annualized)** | Supplier | Tooling Cost (annual) | |-----------|----------------------| | Supplier 1| $23,000 | | Supplier 2| $20,000 | ### 4. **Order Processing Cost** Number of orders per year: \[ \text{Orders per year} = \frac{15,000}{1,000} = 15 \] Order processing cost per year: \[ 15 \times \$150 = \$2,250 \] ### 5. **Inventory Carrying Cost** Average inventory per cycle = Q/2 = 1,000/2 = 500 units Carrying cost per year: \[ 500 \times \text{unit price} \times .20 \] - **Supplier 1:** $500 × 500 × .20 = **$50,000** - **Supplier 2:** $498 × 500 × .20 = **$49,800** ### 6. **Cost of Working Capital** \[ \text{Average inventory value} \times .15 \] - **Supplier 1:** $500 × 500 × .15 = **$37,500** - **Supplier 2:** $498 × 500 × .15 = **$37,350** ### 7. **Back-order & Lost Sales Cost** - **Defects (back-orders):** - Supplier 1: 1% of 15,000 = 150 units (50% lost sales, 50% back order) - Supplier 2: 2% of 15,000 = 300 units (split the same way) - **Back-order cost:** - Supplier 1: 75 units × $19 = $1,425 - Supplier 2: 150 units × $19 = $2,850 - **Lost sales cost:** (Lost unit × ATV price × profit margin) - Supplier 1: 75 × $5,000 × 22% = $82,500 - Supplier 2: 150 × $5,000 × 22% = $165,000 - **Late deliveries:** Use same calculation as defects - Supplier 1: 1% × 15,000 = 150 units → 75 lost sales, 75 back order - Supplier 2: 2% × 15,000 = 300 units → 150 lost sales, 150 back order - **Back-order cost (late):** - Supplier 1: 75 × $19 = $1,425 - Supplier 2: 150 × $19 = $2,850 - **Lost sales cost (late):** - Supplier 1: 75 × $5,000 × 22% = $82,500 - Supplier 2: 150 × $5,000 × 22% = $165,000 ### 8. **Total Quality & Delivery Cost** Add both defect and late delivery costs for each supplier. | Supplier | Back-order | Lost Sales | |-----------|------------|------------| | Supplier 1| $1,425+$1,425 = $2,850 | $82,500+$82,500 = $165,000 | | Supplier 2| $2,850+$2,850 = $5,700 | $165,000+$165,000 = $330,000 | ### 9. **Transportation Costs** Not enough data to compute (ton-miles and distances not provided). **Assume similar for both (omit for decision unless data available).** --- ## **Summary Table: Total Cost Breakdown** | Item | Supplier 1 | Supplier 2 | |-----------------------|--------------|--------------| | Engine cost | $7,500,000 | $7,470,000 | | Cash discount | -$300,000 | -$149,400 | | Tooling cost | $23,000 | $20,000 | | Order processing | $2,250 | $2,250 | | Carrying cost | $50,000 | $49,800 | | Working capital cost | $37,500 | $37,350 | | Back-order cost | $2,850 | $5,700 | | Lost sales cost | $165,000 | $330,000 | | **Total** | **$7,480,600** | **$7,765,700** | --- # **Final Summary** - **Supplier 1** has a higher unit price and tooling cost but offers a larger cash discount and has lower quality and delivery problem costs. - **Supplier 2** offers a lower unit price and tooling cost but higher defect and late delivery costs, and a smaller cash discount. - **Overall, Supplier 1 is more cost-effective**, with a total cost of **$7,480,600** compared to Supplier 2's **$7,765,700**. - **Recommendation:** Choose **Supplier 1** due to lower total cost of ownership, primarily driven by better quality, delivery performance, and cash discount. --- **If you need the formulas used or a more detailed breakdown, let me know!**

## **Key Data Summary** Kuantan ATV, Inc. requires 15,000 engines annually, with two suppliers providing competitive pricing and terms. Supplier 1 offers a unit price of $500 with tooling costs of $23,000, while Supplier 2 has a lower price of $498 and tooling costs of $20,000. ## **Step-by-Step Summary** Total costs were calculated for both suppliers, considering engine costs, cash discounts, tooling, order processing, carrying costs, working capital, back-order, and lost sales costs. Ultimately, Supplier 1 was determined to be more cost-effective, with a total cost of ownership of **$7,480,600** compared to **$7,765,700** for Supplier 2.