Frich Turbo Case Study

Statement of the problem - Deciding which supplier to buy valves from, and negotiating a fair price for Mr. Fingold and Frich Turbo Engine Company as well as the supplier.

Background – Mr. Fingold estimated that a $1.74 would be a reasonable price for the valves, while Bayfleet Machining quoted the unit price at $1.24 and Union Stamping at $1.49.

Discussion – The cost breakdown for Bayfleet Machining shows how Bayfleet Machining and Union Stamping are able to offer such low unit prices. Bayfleet Machining subcontracts parts which help to decrease their cost for direct materials, direct labor, manufacturing overhead, and tooling. Bayfleet is only making a profit of 5% of the total cost which is also keeping the selling price down. Bayfleet Machining proposed a price which is $.50 lower Mr. Fingold’s estimate of reasonable price and $.25 lower than the closest low bidder. Union Stamping is able to provide a proposal of 1.49 because their manufacturing overhead is only 76% of direct labor opposed to Mr. Fingold’s estimate for manufacturing overhead 150% of direct labor.

Recommendations – Mr. Fingold should take the offer of $1.24 from Bayfleet Machining. In the nature of good negotiations I would suggest that Mr. Fingold offer to pay $1.26 per valve to Bayfleet Machining to reward them for their low price and efficiency. This would ensure Bayfleet Machining a profit of 7% of total cost, because Mr. Fingold was already willing to pay a 10% profit of total cost and Bayfleet was only asking 5%. Giving Bayfleet a 7% profit of total cost would be a happy medium. Increasing profit from 5% to 7% would only change the cost for the 10,000 valves from $12,400 at 5% to $12,624 at 7%. This would also be a good gesture on the part of Frich Turbo Engine Company to ensure future transactions and relations with Bayfleet Machining.