Supplier A has old equipment that produces at the rate of 10,000 per hour. Supplier B has equipment that produces at the rate of 20,000 per hour and supplier C has new equipment that produces at 40,000 per hour. You need 60,000 pieces. Each supplier uses the same amount of labor per hour. Disregarding the cost of capital, which supplier should give you the lowest price?
I'd hope it would be the supplier with the fastest equipment. Labor at 40,000 pieces per hour is much less than the others.
To determine which supplier will give you the lowest price, you need to consider the production cost per piece for each supplier.
Let's calculate the production time for each supplier to produce the required quantity of 60,000 pieces.
Supplier A produces at a rate of 10,000 per hour, so it would take:
Time_A = 60,000 pieces / 10,000 pieces per hour = 6 hours
Supplier B produces at a rate of 20,000 per hour, so it would take:
Time_B = 60,000 pieces / 20,000 pieces per hour = 3 hours
Supplier C produces at a rate of 40,000 per hour, so it would take:
Time_C = 60,000 pieces / 40,000 pieces per hour = 1.5 hours
Now that we have the production times, we can compare the total production cost for each supplier. Since the labor cost is the same for all suppliers, we can focus on the variable cost associated with the production time.
Assuming the labor cost is constant per hour, we can simplify the comparison to the production time.
Supplier A: Production time = 6 hours * cost per hour
Supplier B: Production time = 3 hours * cost per hour
Supplier C: Production time = 1.5 hours * cost per hour
Comparing the production times, we can see that Supplier C has the shortest production time, followed by Supplier B and then Supplier A.
Therefore, Supplier C should theoretically have the lowest price, assuming labor costs per hour are the same for all suppliers. However, please note that this analysis disregards the cost of capital, which can significantly impact the overall cost calculation.