Last year Stork Engineering purchased new machinery for £160,000 for use in manufacture of a part used in manufacturing the final product. The current level of output is 400,000 items per year and the production will last another eight years. The direct manufacturing cost per unit is 90 pence and the raw material input costs another 60 pence per unit.

Smart Engineers, a competitive manufacturer of the above part, has developed new technology to manufacture the part and has offered to supply Stork Engineering at 145 pence per unit on one-year renewable contract basis.

As a part of contract, it has also offered to fulfill the entire requirement of Stork Engineering but each batch of supplies would consist of no less than 50000 items.