Question 11.6 SURGERY ASSOCIATES, a local surgery practice group, orders implant

Question

Question 11.6

SURGERY ASSOCIATES, a local surgery practice group, orders implants from device manufactuerers. Order quantities for ten items have been determined based on the past two years of usage. Other relevant information from the practice's inventory records is depicted in Table EX. 11.6. The practice is functional for fifty-two weeks a year.

a. Perform basic EOQ analysis for each item.

b. Classify the implant inventory items according to the ABC analysis.

c. Calculate the yearly inventory management cost.

d. Determine the investment cost (post cycle) for each item.

Implant Yearly Demand Unit Cost Yearly Carrying

Item No. (Unit/Year) Rate of Each Item Ordering Cost

1 104 2,225 12% 6.00

2 260 5,000 10% 5.00

3 728 3,550 8% 12.00

4 1,248 1,205 12% 28.00

5 104 11,100 2% 18.00

6 1,040 1,500 20% 32.00

7 780 1,900 11% 50.00

8 884 3,700 9% 12.00

9 780 6,400 2% 35.00

10 520 2,700 5% 12.00

EX11.6 Multi-Item Inventory - EOQ and ABC Classification Total Total Percentage Annual Item Cost of Length of Annual of Total Annual Item Price/ Carrying Ordering Carrying Carrying Ordering Inventory Order Cycle Investment Costs Annual Item No. Demand Unit cost Rate Cost Cost EOQ Cost Cost Management in Days Cost (Volume) Cost 1 104 $2,225.00 0.12 $6.00 2 260 $5,000.00 0.1 $5.00 3 728 $3,550.00 0.08 $12.00 4 1248 $1,205.00 0.12 $28.00 5 104 $11,100.00 0.02 $18.00 6 1040 $1,500.00 0.2 $32.00 7 780 $1,900.00 0.11 $50.00 8 884 $3,700.00 0.09 $12.00 9 780 $6,400.00 0.02 $35.00 10 520 $2,700.00 0.05 $12.00 Overall Total * Assumes >15% of dollar volume is A , < 1% is C item Investment cost represents the money spent to acquire the items or what has been paid for the inventory in stock. These costs are recovered once items are used, and reinvested in another cycle of ordering. The inventory management costs are the costs involved in managing, maintaining and reordering the stock of items. It includes the holding (carrying) costs (interest, insurance obsolescence,deterioration, spoilage, pilfering and breakage.) and order (administrative) costs.

Explanation / Answer

EX11.6 Multi-Item Inventory - EOQ and ABC Classification Total Total Percentage Annual Item Cost of Length of Annual of Total Annual Item Price/ Carrying Ordering Carrying Carrying Ordering Inventory Order Cycle Investment Costs Annual ABC Classification Item No. Demand Unit cost Rate Cost Cost EOQ Cost Cost Management in Days Cost (Volume) Cost 1 104 $2,225.00 0.12 $6.00 $267.00 2.16 $288.62 $288.62 $577.25 7.57 $4,810.41 $231,977 1.19 B 2 260 $5,000.00 0.1 $5.00 $500.00 2.28 $570.09 $570.09 $1,140.18 3.19 $11,401.75 $1,301,140 6.67 B 3 728 $3,550.00 0.08 $12.00 $284.00 7.84 $1,113.78 $1,113.78 $2,227.57 3.92 $27,844.57 $2,586,628 13.26 B 4 1248 $1,205.00 0.12 $28.00 $144.60 21.98 $1,589.48 $1,589.48 $3,178.96 6.41 $26,491.36 $1,507,019 7.73 B 5 104 $11,100.00 0.02 $18.00 $222.00 4.11 $455.84 $455.84 $911.68 14.37 $45,584.21 $1,155,312 5.92 B 6 1040 $1,500.00 0.2 $32.00 $300.00 14.90 $2,234.28 $2,234.28 $4,468.56 5.21 $22,342.78 $1,564,469 8.02 B 7 780 $1,900.00 0.11 $50.00 $209.00 19.32 $2,018.79 $2,018.79 $4,037.57 9.02 $36,705.21 $1,486,038 7.62 B 8 884 $3,700.00 0.09 $12.00 $333.00 7.98 $1,329.00 $1,329.00 $2,657.99 3.29 $29,533.26 $3,273,458 16.78 A 9 780 $6,400.00 0.02 $35.00 $128.00 20.65 $1,321.82 $1,321.82 $2,643.63 9.64 $132,181.69 $4,994,644 25.61 A 10 520 $2,700.00 0.05 $12.00 $135.00 9.61 $649.00 $649.00 $1,298.00 6.73 $25,959.97 $1,405,298 7.20 B Overall Total $11,570.70 $23,141.39 $362,855.21 $19,505,981.39 * Assumes >15% of dollar volume is A , < 1% is C item Investment cost represents the money spent to acquire the items or what has been paid for the inventory in stock. These costs are recovered once items are used, and reinvested in another cycle of ordering. The inventory management costs are the costs involved in managing, maintaining and reordering the stock of items. It includes the holding (carrying) costs (interest, insurance obsolescence,deterioration, spoilage, pilfering and breakage.) and order (administrative) costs.

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