Atwater Chemicals produces an engine additive for machinery. The additive is produced by adding various ingredients to a petroleum-based lubricant. Atwater purchases the lubricant from two suppliers, Woodlawn Petroleum and Spokane Chemicals. The quality of the final product depends directly on the quality of the lubricant. If the lubricant is "off," Atwater has to dispose of the entire batch. Because all lubricant can be "off," Atwater uses a measure it calls the “yield,” which is computed as

Yield = Good output ÷ Input

where the output and input are both measured in barrels. As a benchmark, Atwater expects to get 12 barrels of good output for every 16 barrels of lubricant purchased for a yield of 75 percent (= 12 barrels of output ÷ 16 barrels of lubricant).

Data on the two suppliers for the past year follow:

	Woodlawn Petroleum	Spokane Chemicals	Total
Total inputs purchased (barrels)	6,120	4,050	10,170
Good output (barrels)	3,978	3,483	7,461
Average price (per barrel)	$ 130.00	$ 163.50	$ 143.34

Required:

Assume that the average quality, measured by the yield, and prices from the two companies will continue as in the past. What is the effective price for lubricant from the two companies when quality is considered?

Effective Price per barrel for each company

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 lubricant that Atwater Chemicals should be willing to pay Woodlawn Petroleum under the exclusive contract?

Maximum price per barrel

Answer rating: 100% (QA)

Comparative Analysis of Lubricant Suppliers Evaluating Quality and Pricing Factors To calculate the effective Price for lubricant from the two companies when quality is considered you need to consider ... View the full answer