QUESTION #$3$ Total Cost Analysis

Primo Caf$$ Inc. has been doing well. Revenue from its three lines of coffee makers have exceeded expectations. In fact, things have been going so well that $$lise$,$ the company$$s innovative CEO and founder, has asked you to complete a supply chain analysis for her other company, Western Tea Inc. Western Tea receives $100\%$ of its tea leaves from China. Elise is concerned about the growing tensions between the U$.$S$.$ and China. Also, during a recent visit to Europe, she was delighted to drink German tea from Ostfriesland. Elise asked you to try an Ostfriesland tea and you had to admit that German black tea is quite zesty! Elise has asked you to evaluate the total cost of purchasing tea leaves from Germany compared to China. Elise is not considering to change suppliers now, but wants a back$-$up plan in case the U$.$S$.$ and China relationship deteriorates even further. Western Tea receives one $20$ container of $5,000$ pounds of tea per month.

You have the following cost information for both suppliers.

Chinese Supplier German Supplier

Price $$25\mathrm{.}00/$pound $$32\mathrm{.}00/$pound

Shipping to port of export $$1,300/$container $$55/$pallet

Ocean freight $(20$ foot container$)$ $$3,250/$container $$1,750/$container

Port Handling Fee $(20$ foot container$)$ $$2,000/$container $$1,000/$container

Intermodal Costs $($per container$)$ $$1,200/$container $$400/$container

Duties on imports are $5\%$ of the price for both suppliers.

The Chinese supplier ships into the Port of Long Beach in California. The German supplier would ship into Montreal, Canada. After off$-$loading in the port, the tea is shipped via Intermodal freight $($rail and truck$)$ to Western Tea$$s Grand Rapids facility.

Western Tea$$s warehousing costs in Grand Rapids will be the same for both $$ $$75$ per pallet.

As with any perishable product, spoilage is a concern. Your best estimate is that $$ for both suppliers $2\mathrm{.}5\%$ of the tea will not survive the trip and will have to be discarded after reaching Western Tea$$s warehouse.

You also know that for a standard product like tea, there are $250$ pounds of tea per pallet and $20$ pallets per $20-$foot $(20)$ container.

Questions on the next page!

Apply the total cost framework presented in class to complete the questions below. Complete all calculations in the excel file you will upload with your exam.

$1.$ Based on this information, provide a complete total cost analysis for each supplier $($per pound, per pallet, and per container$).$ Complete the worksheet in excel.

$2.$ What is the total cost per pound from each supplier?

$3.$ Elise would like a recommendation on which supplier that Western Tea should use. Given the information above, what would you recommend? Why?

$4.$ Elise recognizes that, in the U$.$S$.$ market, the perceived value of German tea is much higher than Chinese tea. By marketing Western Tea as the $$premium German tea$$ provider in the U$.$S$.,$ she believes that she can increase Western Tea$$s sales price by $$0\mathrm{.}50/$ ounce $($$$8\mathrm{.}00/$pound$).$ Given this information, would that change your recommendation? Why or why not?