Question: Extended Learning Exercise Chrysler is considering a cost reduction program with its major suppliers wherein the suppliers must reduce the cost of the components that they furnish to Chrysler by 5% each year. (The total amount of savings would increase each year.)
The initial costs for setting up the program include the following:
• Program Setup: $12,500,000
• Feasibility Study (completed six months ago): 1,500,000
• Supplier Training: 7,500,000
Chrysler is currently paying a total of $85,000,000 per year for components purchased from the vendors who will be involved in this program. (Assume that, if the program is not approved, the annual cost of purchased components will remain constant at $85,000,000 per year.) The program has been designed as a five-year initiative, and Chrysler's MARR for such projects is 12% (im). There will be annual operating expenses associated with the program for further training of vendors, updating internal documentation, and so on. Given the projected savings in purchased components, what would be the maximum annual operating expense for this program such that it is marginally justified?