Companies RP, RR, RS and RT are members of a group. RP wishes to buy an electronic control system for its factory and, in accordance with group policy, must obtain quotations from companies inside and outside of the group.

From outside of the group the following quotations are received:

Company A quoted Rs.33,200.

Company B quoted Rs.35,000 but would buy a special unit from RS for Rs.13,000. To make this unit, however, RS would need to buy parts from RR at a price of Rs.7,500.The inside quotation was from RS whose price was Rs.48,000. This would require RS buying parts from RR at a price of Rs.8,000 and units from RT at a price of Rs.30,000. However, RT would need to buy parts from RR at a price of Rs.11,000.

Additional data are as follows:

(1) RR is extremely busy with work outside the group and has quoted current market prices for all its products.

(2) RS costs for the RP contract, including purchases from RR and RT, total Rs.42,000. For the Company B contract it expects a profit of 25% on the cost of its own work.

(3) RT prices provide for a 20% profit margin on total costs.

(4) The variable costs of the group companies in respect of the work under consideration are:

RR: 20% of selling price.

RS: 70% of own cost (excluding purchases from other group companies)

RT: 65% of own cost (excluding purchases from other group companies) You are required, from a group point of view, to:

(a) Recommend, with appropriate calculations, whether the contract should be placed with RS or Company A or Company B;

(b) State briefly two assumptions you have made in arriving at your recommendations.

Answer rating: 100% (QA)

It is not possible to recommend a single company to provide the electronic control system as the mos... View the full answer