BAO$5522-$ CASE STUDY $1$

It$$s nice to have supply options, but I$$m going bananas trying to sort out these slit steel bids, exclaimed

Christopher Lane, purchasing manager for Sarbec Ltd$.$

$$I see what you mean$,$ responded Jack Martin, Lane$$s assistant. Let me call my friend over in the accounting

office. He$$ll have some suggestionsfor us$.$

Sarbec Ltd needs a total of $125$ tonnes of sheet steel$50$ tonnes of $4$ centimetre width and $75$ tonnes of $8$

centimetre width for a customer$$s job. Sarbec can purchase the sheet steel in these widths directly from

Jensteel Ltd$,$ a steel manufacturer, or it can purchase sheet steel from Jensteel that is $48$ centimetres wide and

then have itslit into the desired widths by Precut Pty Ltd$.$ both vendors are local and have previously

supplied materialsto Sarbec.

Precut specialises in slitting sheet steel, provided by a customer, into any desired width. When negotiating a

contract, Precut tells its customers that there is a scrap loss in the slitting operation, but that this loss has

never exceeded $2\mathrm{.}5$ per cent of input tonnes. 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 $48-$centimetre sheet steel is a regular stock item of Jensteel and can be shipped to Precut within five days

of receipt of Sarbec$$s purchase order. IfJensteel isto do the slitting,shipment to Sarbec would be

scheduled for $15$ daysfrom receipt of the order. Precut has quoted delivery at $10$ days after receipt of the

sheetsteel. In prior dealings, Sarbec has found both Jensteel and Precut to be reliable vendors with high

quality products.

Sarbec has received the following price quotations from Jensteel and Precut:

Jensteel Ltd rates

Size Gauge Quantity Cost per tonne

$4$ cm $1450$ tonnes $$210\mathrm{.}00$

$8$ cm $1475$ tonnes $200\mathrm{.}00$

$48$ cm $14125$ tonnes $180\mathrm{.}00$

Precut Pty Ltd steel slitting rates

Size Gauge Quantity Price per tonne of output

$4$ cm $1450$ tonnes $$18\mathrm{.}00$

$8$ cm $1475$ tonnes $15\mathrm{.}00$

Freight and handling charges

Destination Cost per tonne

Jensteel to Sarbec $$10\mathrm{.}00$

Jensteel to Precut $5\mathrm{.}00$

Precut to Sarbec $7\mathrm{.}50$

In addition to the above information, Precut has informed Sarbec that if Sarbec purchases $100$ output

tonnes of each width, the per$-$tonne slitting rates would be reduced by $12$ per cent.

Sarbec knows that 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\mathrm{.}50$ per

month for each tonne. There would be no change in Jensteel$$s prices for additional tonnes delivered to Precut.

As Martin$$s friend in the accounting office, you have just received a phone call for help.

Required:

$1.$ Prepare an analysis to determine whether Sarbec Ltd should:

$($a$)$ purchase the required slit steel directly from Jensteel Ltd

$($b$)$ purchase the $48-$centimetre sheet steel from Jensteel and have it slit by Precut Pty Ltd into $50$ output

tonnes, $4$ centimetres wide and $75$ output tonnes, $8$ centimetres wide.

$($c$)$ take advantage of Precut$$s reduced slitting rates by purchasing $100$ output tonnes of each width.

Round all cost figuresto the nearest cent.

$2.$ Independent of your answer to requirement $1,$ present three additional reasons, reflecting qualitative rather

than financial information, why Sarbec Ltd may favour the purchase of the slitsteel directly from Jensteel Ltd$.$

$3.$ Independent of your answers to requirements $1$ and $2,$ suppose that Christopher Lane$$s final analysis

shows that purchasing slit steel directly from Jensteel is Sarbec$$s least costly option. Before making his

decision, Lane receives a call from a good friend who is the production manager at Precut. His friend has

called to urge Lane to use Precut$$s services. $$We$$re really hurting here at Precut, Chris, his friend insists.

$$If we don$$t get this job, it$$s going to be a long cold winter for some of us$.$

Discuss Christopher Lane$$s ethical obligationsin this matter