JFI Foods produces processed foods. Its basic ingredient is afeedstock that is mixed with other ingredients to produce the finalpackaged product. JFI purchases the feedstock from two suppliers,Rex Materials and Red Oak Chemicals. The quality of the finalproduct depends directly on the quality of the feedstock. If thefeedstock is not correct, JFI has to dispose of the entire batch.All feedstock in this business is occasionally “bad,” so JFImeasures what it calls the “yield,” which is measured as,
Yield = Good output ÷ Input
where the output and inputs are both measured in tons. As abenchmark, JFI expects to get 20 tons of good output for every 25tons of feedstock purchased for a yield of 80 percent (= 20 tons ofoutput ÷ 25 tons of feedstock).
Data on the two suppliers for the past year follow:
Rex Materials
Red Oak Chemicals
Total
Total inputs purchased (tons)
1,470
2,370
3,840
Good output(tons)
1,279
1,668
2,947
Average price(per ton)
$
240
$
200
$
215
The sales manager of Red Oak Chemicals has proposed to thepurchasing manager at JFI that Red Oak be given an exclusivecontract to supply the feedstock. If it receives the contract, RedOak will guarantee an 80 percent yield on the feedstock itsupplies.
Required:
a. Assume that the average quality, measured bythe yield, and prices from the two companies will continue as inthe past. What is the maximum price for feedstock that JFI shouldbe willing to pay Red Oak under the exclusive contract?(Round intermediate calculations and final answer to 2decimal places.)
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