MA75 Problem: Relevant Costing – Buying Decision - Tsui Company

MA75 Problem: Relevant Costing – Buying Decision - Tsui Company

Tsui Company needs a total of 125 tons of sheet steel, 50 tons of 2-inch width and 75 tons of 4-inchwidth, for a customer's job. Tsui can purchase the sheet steel in these widths directly from JensteelCorporation, a steel manufacturer, or it can purchase sheet steel from Jensteel that is 24 inches wide andhave it slit into the desired widths by Precut, Inc. Both vendors are local and have previously suppliedmaterials to Tsui.Precut specializes in slitting sheet steel that is provided by a customer into any desired width. Whennegotiating a contract, Precut tells its customers that there is a scrap loss in the slitting operation, but thatthis loss has never exceeded 2.5% of input tons. Precut recommends that if a customer has a specifictonnage requirement, it should supply an adequate amount of steel to yield the desired quantity. Precut'scharges for steel slitting are based on good output, not input handled.The 24-inch wide sheet steel is a regular stock item of Jensteel and can be shipped to Precut within fivedays after receipt of Tsui's purchase order. If Jensteel is to do the slitting, shipment to Tsui would bescheduled for 15 days after receipt of Tsui's purchase order. Precut has quoted delivery at 10 days after receipt of the sheet steel. In prior dealings, Tsui has found both Jensteel and Precut to be reliable vendorswith high-quality products.Tsui has received the following price quotations from Jensteel and Precut:

 Jensteel Corporation Rates

Size Gauge Quantity Cost Per Ton

2 inch 14 50 tons $2104 inch 14 75 tons 20024 inch 14 125 tons 180

 Precut, Inc., Steel Slitting Rates

 Price Per TonSize Gauge Quantity Of Output 

2 inch 14 50 tons $184 inch 14 75 tons 15

Freight And Handling Charges

 Destination Cost Per Ton

Jensteel to Tsui $10.00Jensteel to Precut 5.00Precut to Tsui 7.50

In addition, Precut has informed Tsui that if it purchases 100 output tons of each width, the per-tonslitting rates would be reduced 12%. Tsui knows that the same customer will be placing a new order inthe near future for the same material and estimates it would have to store the additional tonnage for anaverage of two months at a carrying cost of $1.50 per month for each ton. There would be no change inJensteel's prices for additional tons delivered to Precut.

 Required -

a. Prepare an analysis that will show whether Tsui Company should:1. Purchase the required slit steel directly from Jensteel Corporation.2. Purchase the 24-inch wide sheet steel from Jensteel and have it slit by Precut into 50output tons 2 inches wide and 75 output tons 4 inches wide.3. Take advantage of Precut's reduced slitting rates by purchasing 100 output tons of eachwidth. b. Without prejudice to your answer to Requirement (a), present qualitative arguments why TsuiCompany may favour the purchase of the slit steel directly from Jensteel Corporation.