Consider a single manufacturer and a single supplier Six months before demand is realized the manufacturer has to sign a supply contract with the supplier The sequence of events is as follows Procurem

To determine the procurement strategy that should be used by the manufacturer, we need to calculate the expected profit for each option and compare them.

Option 1: Fixed commitment contract with Company 1 Under this option, the manufacturer would buy electricity in advance at a fixed price of $10 per unit from Company 1. The expected profit can be calculated as follows:

Expected demand for electricity = 10,000 units * 0.3 + 15,000 units * 0.5 + 20,000 units * 0.2 = 14,500 units

Total cost of electricity = 14,500 units * $10 per unit = $145,000

Total revenue from sales = 14,500 units * $20 per unit = $290,000

Expected profit = Total revenue - Total cost = $290,000 - $145,000 = $145,000

Option 2: Option contract with Company 2 Under this option, the manufacturer would pay a reservation price of $6 per unit to Company 2 and then pay $6 per unit for each unit of electricity delivered. The expected profit can be calculated as follows:

Expected demand for electricity = 10,000 units * 0.3 + 15,000 units * 0.5 + 20,000 units * 0.2 = 14,500 units

Total cost of electricity = Reservation price + (Expected demand - Reservation quantity) * Delivery price = $6 per unit + (14,500 - 10,000) * $6 per unit = $39,000

Total revenue from sales = 14,500 units * $20 per unit = $290,000

Expected profit = Total revenue - Total cost = $290,000 - $39,000 = $251,000

Therefore, the procurement strategy that should be used by the manufacturer is to choose the option contract with Company 2, as it results in a higher expected profit of $251,000 compared to the fixed commitment contract with Company 1, which results in an expected profit of $145,000.