What cost reduction would you report

Reference no: EM132761277

Question: One of your MRO suppliers has approached you with solid evidence that its costs have risen, and market prices for MRO have also risen. You investigate this and find out that it is true. For safety supplies, the costs have risen on average 5%. The supplier wants a 5% price increase.

a. Assume that you can negotiate with the supplier so that it only raises prices by 3%. If you would have spent USD 1 million with them before the price increase, what cost avoidance would you report? What cost reduction would you report?

b. What cost avoidance and reduction would you report if you were able to switch to different items with the same functionality and reduce the proposed 5% increase to a 2% decrease on USD 1 million?

c. Assume that your company does not report any cost-avoidance savings. You negotiate with your supplier for only a 3% increase this year. Next year, the supplier will reduce the price back to the price you are paying this year. What would count towards cost reduction and cost avoidance this year and next year? Is there anything wrong with delaying the price reduction until next year? Please explain why this is or is not questionable.

Reference no: EM132761277

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