1. Big Bird Air is legally obligated to purchase 50 jet engine from ERUS at the end of two years at a price of $ 200000 per engine. Confident that it is protected from opportunism with this contract, Big Bird begins making aircraft bodies designed to fit ERUS’s engines. Due to unforeseen events in the aerospace industry, in the second year of the contract ERUS is in the brink of bankruptcy. It tells Big Bird that unless it increase the engine price to $300000, it will go bankrupt . a. What should the manager of Big Bird Air do? b. How could this problem have been avoided? c. Did the manager of Big Bird use the wrong method of acquiring inputs? Answer : a. Big Bird Air is legally obligated to purchase 50 jet engine from ERUS at the end of two years at a price of $ 200000 per engine. It tells Big Bird that unless it increase the engine price to $300000, it will go bankrupt. Firstly, the manager of Big Bird Air should take into consideration all the risks of the purchase. b. This problem could have been avoided, if Big Bird fixed the price of the contract or predicted the change in price of the inputs. Having multiple suppliers is a way to mitigate the risk of over-dependency on a single supplier. In this case, however, it is not stated whether BBA’s entire demand was being addressed by ERUS. BBA can meet its demand of engines through another supplier in the industry. If BBA has not taken delivery of any engines, it is not obligated to pay for them hence BBA may have funds budgeted which can be given to another supplier to meet its needs. It is also not stated if there is a price protection clause in the contract that takes into c. Here information is not enough which can say that manager used incorrect method to acquire inputs. ERUS could be the only supplier of such engines in the geography or industry or ERUS could be the choice of BBA due to its pricing which may not have been matched by
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- Summer '16