A firm that is experiencing a supply constraint for a fast-selling product determines that a reason for the constraint is the investment required to expand capacity. Which of the following types of contracts would be most appropriate for the firm to offer the supplier to increase output?
A cost sharing contract would be the most appropriate for a firm experiencing a supply constraint due to the investment required to expand capacity. In a cost-sharing arrangement, both the firm and the supplier share the costs associated with expanding production capacity. This reduces the financial burden on the supplier and incentivizes them to increase output, addressing the supply constraint while mitigating financial risks for both parties.
Why not D ?
The company can offer to share the costs of expanding production capacity, which may allow the supplier to increase production without assuming all the financial risk associated with the investment.
cost-sharing contract, the buyer and supplier agree to share the costs of expanding the supplier's capacity. This type of contract is well-suited to situations where the buyer is experiencing a supply constraint for a fast-selling product and the supplier is hesitant to invest in expanding capacity due to the financial risk involved.