JFI Foods produces processed foods. Its 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 it calls the "yield," which is measured as, Yield = Good output ÷ Input where the output and inputs are both measured in tons. As a benchmark, JFI expects to get 11 tons of good output for every 20 tons of feedstock purchased for a yield of 55 percent (= 11 tons of output ÷ 20 tons of feedstock). Data on the two suppliers for the past year follow: Rex Materials Red Oak Chemicals Total Total inputs purchased (tons) 1,380 2,280 3,660 Good output (tons) 1,311 1,578 2,889 Average price (per ton) $ 195 $ 155 $ 170 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 it receives the contract, Red Oak will guarantee an 55 percent yield on the feedstock it supplies. 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?
JFI Foods produces processed foods. Its 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 it calls the "yield," which is measured as,
Yield = Good output ÷ Input
where the output and inputs are both measured in tons. As a benchmark, JFI expects to get 11 tons of good output for every 20 tons of feedstock purchased for a yield of 55 percent (= 11 tons of output ÷ 20 tons of feedstock).
Data on the two suppliers for the past year follow:
| Rex Materials | Red Oak Chemicals | Total | |||||||
| Total inputs purchased (tons) | 1,380 | 2,280 | 3,660 | ||||||
| Good output (tons) | 1,311 | 1,578 | 2,889 | ||||||
| Average price (per ton) | $ | 195 | $ | 155 | $ | 170 | |||
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 it receives the contract, Red Oak will guarantee an 55 percent yield on the feedstock it supplies.
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?
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