Dee and Carol are owners of a company supplying tin cans to countries at war Thi

Question

Dee and Carol are owners of a company supplying tin cans to countries at war This war tin company has had a history of lack of control, particularly in the production- inventory area. Both Dee and Carol expect to sell 900 cases of tin cans over the next year (300 days), but they are uncertain as to how they should procure and inventory the cans. Dee prefers to order the cans from an outside supplier where he can obtain them at $50.00 a case to be delivered within 2 days of an order. He estimates ordering cost at $20.00/order. Annual carrying charges include 15% interest charge along with insurance and taxes that amount to $2.50 per unit of average inventory (these are two separate costs) Carol prefers to produce the cans internally. She claims that the company has the capacity to produce 6 cases a day. The setup cost (ordering) and carrying costs remain e same as if the cans were purchased outside. What would be the inventory policy if Dee's scheme is followed? What would be the inventory policy if Carol's scheme is followed? Which would you recommend and why? a. b. c. d. Suppose Dee finds a dealer that will give him a 2% discount if he orders more than 900 cases at a time. Would your recommendation change? Explain Suppose that Carol wants to investigate the possibility of backordering cases of cans. She estimates that the stockout cost would be only $.50 per case per year What is Carol's optimal inventory policy in this case? e. f. What is vour final suggestion to Dee and Carol concerning the inventory policv that they should adopt? Why? Illustrate each of the above inventory policies with the appropriate diagrams

Explanation / Answer

Annual demand, D = 900 cases

Demand rate, d = 900/300 = 3 per day

Ordering cost, K = $ 20

Item cost, P = $ 50

Holding cost, H = 50*15% + 2.5 = $ 10

1) a) Inventory policy under Dee's scheme (Economic order quantity EOQ model)

Order quantity = (2*D*K/H) = (2*900*20/10) = 60

Reorder point = daily demand * lead time = 3*2 = 6

Therefore, inventory policy under Dee's scheme is to order 60 units at a time and place the order when inventory level reaches 6

b) Carol's scheme (Economic Production Quantity EPQ model)

Production rate, p = 6 cases a day

Batch size = (2*D*K/(H*(1-d/p)) = (2*900*20/(10*(1-3/6))) = 85 cases

c) Total annual cost of Dee's scheme = ordering cost + carrying cost = (D/Q)*K + (Q/2)*H = (900/60)*20 +(60/2)*10 = $ 600

Total annual cost of Carol's scheme = = (D/Q)*K + (Q/2)*(1-d/p)*H = (900/85)*20 + (85/2)*(1-3/6)*10 = $ 424

Total annual cost of Carol's scheme is lower. Therefore, Carols'scheme is recommended.

d) Item cost with 2% discount = 50*(1-2%) = $ 49

Holding cost = 49*0.15+2.5 = 9.85

With order quantity of 900 cases, total annual invetory related cost = (900/900)*20 + (900/2)*9.85 = $ 4452

Savings in annual purchase cost with 2% discount = 900*50*2% = $ 900

We see the annual inventory related cost increased from $ 424 (Carol's scheme ) to $ 4452. , but savings due to discount is only $ 900. Therefore, this scheme is not beneficial.

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