USING EXTERNAL PRICE INDEXES-PROBLEM 1 In June 2012, a buyer entered into a three-year agreement with a supplier that provides plastic water pipe. Among other things, this agreement features fixed pricing over the life of the agreement. It is now March 2015, and the agreement with this supplier is up for review and possibly renewal. While the supplier's over-all performance has been excellent, the supplier has already indicated it intends to seek a 3% price increase to cover what it calls escalating costs. The time has come to start thinking about renewing this contract. Please answer the following questions using the data in Table 10.1. Table 10.1 Series Id: WPU072106033 Group: Rubber and plastic products Item: Plastics water pipe Base Date: 201112 Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2011 2012 100.4 103.1 105.0 106.7 108.4 110.1 103.4 101.2 1022 104.5 1060 105.3 2013 105.8 106.4 107.8 107.3 107.4 106.9 105.8 106.2 105.6 1026 1029 102.8 2014 104.4 107.4 109.8 110.7 107.1 105.3 107.7 107.3 107.9 1102 1082 105.8P 2015 104.3P 108.5P 106.3P) P. Preliminary Indexes are subject to revision four months after original publication 1. What is the average PPI for this item for 2012, 2013, and 2014? Do you believe the price index for this item is relatively stable or volatile? 2. In retrospect, was the decision to pursue fixed pricing with this supplier a good economic decision from the buyer's perspective? Why or why not? Provide quantitative evidence. 3. What was the percent change in the index from June 2012 to July 2012? What was the percent change from January 2014 to April 2014? What could have caused these changes in prices and therefore, the index? 4. If the buyer intends to renew the agreement for another two years with this supplier, do you feel the 3% price increase is reasonable? Why or why not? What other information might you need to know to make an informed decision? 5. What type of pricing arrangements or language would you propose for this contract if it is renewed