Tsui Company needs a total of 125 tons of sheet steel, 50 tons of 2-inch width and 75 tons of 4-inch width, for a customer’s job. Tsui can purchase the sheet steel in these widths directly from Jensteel Corporation, a steel manufacturer or it can purchase sheet steel from Jensteel that is 24 inches wide and have it slit into the desired widths by Precut, Inc. Both vendors are local and have previously supplied materials to Tsui.
Precut specializes in slitting sheet steel provided by a customer into any desired width. When negotiating a contract, Precut tells its customers there is a scrap loss in the slitting operation, but this loss has never exceeded 2.5% of input tons. Precut recommends that if a customer has a specific tonnage requirement, it should supply an adequate amount of steel to yield the desired quantity. Precut’s charges 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 five days after receipt of Tsui’s purchase order. If Jensteel is to do the slitting, shipment to Tsui would be scheduled for 15 days after receipt of Tsui’s purchase order. Precut has quoted delivery of 10 days after receipt of the sheet steel. In prior dealings, Tsui has found both Jensteel and Precut to be reliable vendors with 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
$210
4-inch
14
75 tons
200
24-inch
14
125 tons
180
Precut, Inc., Steel Slitting Rates
Size
Gauge
Quantity
Price Per Ton of Output
2-inch
14
50 tons
$18
4-inch
14
75 tons
15
Freight And Handling Charges
Destination
Cost Per Ton
Jensteel to Tsui
$10.00
Jensteel to Precut
5
Precut to Tsui
7.5
In addition, Precut has informed Tsui that if it purchases 100 output tons of each width, the per ton slitting rates would be reduced 12%. Tsui knows the same customer will be placing a new order in the near future for the same material and estimates it would have to store the additional tonnage for an average of two months at a carrying cost of $1.50 per month for each ton. There would be no change in Jensteel’s prices for additional tons delivered to Precut.
Required:
1. Prepare an analysis that will show whether Tsui Company should:
a. Purchase the required slit steel directly from Jensteel Corporation.
b. Purchase the 24-inch wide sheet steel from Jensteel and have it slit by Precut into 50 output tons two inches wide and 75 output tons four inches wide.
c. Take advantage of Precut’s reduced slitting rates by purchasing 100 output tons of each width.
2. Without prejudice to your answer to Required 1 above, present qualitative arguments why Tsui Company may favour the purchase of the slit steel directly from Jensteel Corporation.
