A Belt working in a supply chain environment has to make a decision to change suppliers of critical raw materials for a new product upgrade. The purchasing manager is depending on the Belt's effort requiring that the average cost of an internal critical raw material component be less than or equal to $3,800 in order to stay within budget. Using a sample of 38 first article components, a Mean of the new product upgrade price of $3,680, and a Standard Deviation of $120 was estimated. In order to increase the Long Term Z value to 5, what is the maximum long term variation in pricing the Belt can accept for his upgraded critical raw material component?

Question

A Belt working in a supply chain environment has to make a decision to change suppliers of critical raw materials for a new product upgrade.  The purchasing manager is depending on the Belt's effort requiring that the average cost of an internal critical raw material component be less than or equal to $3,800 in order to stay within budget.  Using a sample of 38 first article components, a Mean of the new product upgrade price of $3,680, and a Standard Deviation of $120 was estimated.  In order to increase the Long Term Z value to 5, what is the maximum long term variation in pricing the Belt can accept for his upgraded critical raw material component?

Quizplus · Accepted Answer

To increase the long term Z value to 5, we need to calculate the long term variation in pricing that corresponds to a Z value of 5.

Z = (x - mu) / sigma

Where:
Z = desired Z value 
mu = mean 
sigma = standard deviation 
x = maximum price variation

Solving for x, we get:

x = Z * sigma + mu

x = 5 * $120 + $3,680

x = $4,280

So, the Belt can accept a maximum long term variation in pricing of $4,280 - $3,800 = $480.

The closest option to this value is option C, $24.

A Belt Working in a Supply Chain Environment Has to Make