r odnny ue ordered 15/ David\'s Delicatessen flies /ing in Hebrew National salam
ID: 424505 • Letter: R
Question
r odnny ue ordered 15/ David's Delicatessen flies /ing in Hebrew National salamis regularly to satisfy a grow- alamis in Silicon Valley. The owner, David Gold, estimates ost Gold $1.85 each. The fixed cost of calling his brother in New York and having the salamis flown in is $200. It takes three weeks to receive an order. Gold's account- ant, Irving Wu, recommends an annual cost of capital of 22 percent, a cost of shelf space of 3 percent of the value of the item, and a cost of 2 percent of the value for that the demand for the salamis is pretty steady at 175 per month. The salamis c taxes and insurance. a. How many salamis should Gold have flown in and how often should he order them? send another shipment? for Gold? If so, what annual profit can he expect to realize from this item? b. How many salamis should Gold have on hand when he phones his brother to c. Suppose that the salamis sell for $3 each. Are these salamis a profitable item (Assume that he operates the system optimally.) d. If the salamis have a shelf life of only 4 weeks, what is the trouble with the pol- icy that you derived in part (a)? What policy would Gold have to use in that case? Is the item still profitable?Explanation / Answer
Annual Demand, D = 175 per month * 12 months = 2100
Unit cost, C = $ 1.85
Fixed order cost, S = $ 200
Holding cost, H = 1.85*(22%+3%+2%) = $ 0.5
Lead time, L = 3 weeks / 4.33 weeks per month = 0.6923 months
a) Number of salamis Gold should have flown in (Q) = SQRT(2DS/H) = SQRT(2*2100*200/0.5) = 1296
How often he should order = (Q/D)*12 = (1296/2100)*12 = 7.4 months per order
He should order every 7.4 months
b) Number of salamis he should have on hand at time of ordering = D*L = 175*0.6923 = 121 salamis
c) Total annual cost = Ordering cost + Holding cost + Cost of salamis = (2100/1296)*200 + (1296/2)*0.5 + 2100*1.85 = $ 4533
Profit = Revenue - Cost = 2100*3 - 4533 = $ 1767
d) In this case, the salamis can only be kept in inventory for 4 weeks. Therefore, in this case, periodic review policy has tl be used. order has to be placed every 4 weeks. Average order quantity would be equal to 4 weeks demand = (2100/52)*4 = 161
Total cost = 2100*1.85 + (161/2)*0.5 + (2100/161)*200 = 6534
Profit = 2100*3 - 6534 = -$ 234
We see that this policy is not profitable.
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