A renewable-energy firm is sourcing a redesigned battery casing from a supplier that has produced prototypes successfully but has not yet manufactured the casing at commercial volume. The buyer expects early production data to reveal whether labour hours, scrap rates, and material usage are close to the estimates. The supplier is willing to commit capacity, but it does not want the first price to become permanent if production conditions differ materially from the assumptions. Which contract approach best fits this situation?

Question

Answer

Use a time and materials contract because all production inputs should be reimbursed until the process is stable.

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Set an initial price from current estimates and redetermine the price once agreed production evidence is available.

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Use a firm fixed price because prototype approval confirms that the supplier can manufacture the casing correctly.

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Place separate spot orders because the buyer should avoid any continuing commitment until full cost certainty exists.

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A renewable-energy firm is sourcing a redesigned battery casing from a supplier ...

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