Reference no: EM13358771

Electronic Unit Pricing in Supply Chain Management; Honda Allowed Mechanic's Rate

You have just received 10 units of a special subassembly from an electronics manufacturer at a price of $250 per unit. A new order also has just come in for your company's product that uses these subassemblies, and you wish to purchase 40 more to be shipped in lots of 10 units each. (The subassemblies are bulky, and you need only 10 a month to fill your new order.)

a. Assuming a 70 percent learning curve by your supplier on a similar product last year, how much should you pay for each lot? Assume that the learning rate of 70 percent applies to each lot of 10 units, not each unit.

b. Suppose you are the supplier and can produce 20 units now but cannot start production on the second 20 units for two months. What price would you try to negotiate for the last 20 units?

Honda Motor Company has discovered a problem in the exhaust system of one of its automobile lines and has voluntarily agreed to make the necessary modifications to conform with government safety requirements. Standard procedure is for the firm to pay a flat fee to dealers for each modification completed.

Honda is trying to establish a fair amount of compensation to pay dealers and has decided to choose
a number of randomly selected mechanics and observe their performance and learning rate. Analysis
demonstrated that the average learning rate was 90 percent, and Honda then decided to pay a $60
fee for each repair (3 hours x $20 flat-rate hour).

Southwest Honda, Inc., has complained to Honda Motor Company about the fee. Six mechanics, working independently, have completed two modifications each. All took 9 hours on the average to do the first unit and 6.3 hours to do the second. Southwest refuses to do any more unless Honda allows at least 4.5 hours. The dealership expects to perform the modification to approximately 300 vehicles.

What is your opinion of Honda's allowed rate and the mechanics' performance?