Horizon Cellular manufactures cell phones for exclusive use in its communication
ID: 335681 • Letter: H
Question
Horizon Cellular manufactures cell phones for exclusive use in its communication network. Management must select a circuit board supplier for a new phone soon to be introduced to the market. The annual requirements (D) are 60,000 units and Horizon's plant operates 250 days per year. The data for three suppliers are in the following table Annual Freight Costs Shipping Quantity (Q) Price/Unit Annual Holding Lead Time Annual ost/Uit (H)(L) (days) Administrative Cost Supplier Abbott Baker Carpenter 10,000 $10,000 $12,000$9,000 $11,000$8,000 20,000 $8,000 $29 $28 $30 $5.80 $5.60 $6.00 $10,000 $12,000 $11,000 7 Which supplier and shipping quantity will provide the lowest total cost for Horizon Cellular? Using (1) annual total costs to Horizon Cellular of $ and a shipping quantity of (2) units is the lowest cost alternative, with (Enter your response as an integer.)Explanation / Answer
Solution:
Annual total costs is calculated as;
Annual total cost = pD + Freight costs + [(Q/2 + dL) x H] + Administrative cost
where;
p = price/unit
D = Annual demand
Q = Quantity
d = daily demand
L = lead time (in days)
H = Annual holding cost
The total annual cost of each supplier is calculated as below:
1) Abbott: (Q = 10,000 units)
Annual total cost = ($29 x 60,000) + $10,000 + [(10000/2 + {240 x 5}) x $5.80] + $10,000
Annual total cost = $1,795,960
2) Abbott: (Q = 20,000 units)
Annual total cost = ($29 x 60,000) + $8,000 + [(20000/2 + {240 x 5}) x $5.80] + $10,000
Annual total cost = $1,822,960
3) Baker: (Q = 10,000 units)
Annual total cost = ($28 x 60,000) + $12,000 + [(10000/2 + {240 x 4}) x $5.60] + $12,000
Annual total cost = 1704000 + 33376
Annual total cost = $1,737,376
4) Baker: (Q = 20,000 units)
Annual total cost = ($28 x 60,000) + $9,000 + [(20000/2 + {240 x 4}) x $5.60] + $12,000
Annual total cost = 1680000 + $9,000 + 61,376 + $12,000
Annual total cost = $1,762,376
5) Carpenter: (Q = 10,000 units)
Annual total cost = ($30 x 60,000) + $11,000 + [(10000/2 + {240 x 7}) x $6.00] + $11,000
Annual total cost = $1,862,080
6) Carpenter: (Q = 20,000 units)
Annual total cost = ($30 x 60,000) + $8,000 + [(20000/2 + {240 x 7}) x $6.00] + $11,000
Annual total cost = $1,889,080
Answer: Using (1) Baker and a shipping quantity of (2) 10,000 units is the lowest cost alternative, with annual total costs to Horizon Cellular of $1,737,376.
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