Consider the information in Problem. The sales manager of Red Oak Chemicals has proposed to the purchasing manager at JFI that Red Oak be given an exclusive contract to supply the feedstock. If they receive the contract, Red Oak will guarantee an 80 percent yield on the feedstock they supply.
In Problem, JFI Foods produces processed foods. Their basic ingredient is a feedstock that is mixed with other ingredients to produce the final packaged product. JFI purchases the feedstock from two suppliers, Rex Materials and Red Oak Chemicals. The quality of the final product depends directly on the quality of the feedstock. If the feedstock is not correct, JFI has to dispose of the entire batch. All feedstock in this business is occasionally "bad," so JFI measures what they call the "yield," which is measured as,
Yield = Good output ÷ InputWhere the output and inputs are both measured in tons. As a benchmark, JFI expects to get 8 tons of good output for every 10 tons of feedstock purchased for a yield of 80 percent (= 8 tons of output ÷ 10 tons of feedstock).
Data on the two suppliers for the past year follow:
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Required :
a. Assume that the average quality, measured by the yield and prices from the two companies will continue as in the past. What is the maximum price for feedstock that JFI should be willing to pay Red Oak under the exclusive contract?
b. Are there other factors that JFI should consider before accepting the offer?