Question 1

The cost analysis presented, which was prepared in relation to the previous order, should be reviewed. Material cost should increase by only 10% and may be reduced if the supplier can avail of quantity discounts. Given the larger quantities, such a discount may be possible. Labour cost should come down to €45.00 per tonne, based on a rudimentary application of the learning curve. Production Overheads, charged on the basis of labour cost should reduce to €50 also accordingly. The set up costs of €13,000 were spread over 650 tonnes on the first order, but the next order is double this, to the cost per unit comes down accordingly to €10. The revised cost of the batch is therefore €375, as opposed to €370 on the first order.

The table below summarises these:

The new price offered is €508.75 per tonne. Armed with the information above it should be possible to get the supplier to agree to a price in the region of €468. By arguing that the margin is high considering the larger batch, and the potential growth in the future, better might be achieved.

A negotiating strategy, as to how this might be achieved should be developed. An important aspect of such a strategy is the best alternative to a negotiated agreement BATNA. Paying the suppliers price is one option but making the component in-house is now also a viable option, as is the possibility of finding a new supplier.

The question asks for a ‘report’ this should be addressed to, signed by, and dated.