A computer equipment retailer has four retail locations. Currently each outlet m

Question

A computer equipment retailer has four retail locations. Currently each outlet manages its ordering independently. Demand at each retail outlet averages 4,000 units per week. Each unit costs $200; the holding cost is 20% per annum. The fixed cost of each order (administrative plus transportation) is $900. Assume 50 weeks in a year. If the purchasing centralizes purchasing (for all four outlets), the retailer will only have to place a single order for all the outlets. The supplier will deliver the order on a common truck to a transit point and individual outlet requirements are identical. The total order is split equally and shipped to the retailers from this transit point. The entire operation has increased the fixed cost of placing an order to $1,800. If the inventory cost under decentralization (each outlet orders individually) is $120,000, how much is the company saving as the result of centralization?

Select one:

A. $339,411

B. $120,000

C. $480,000

D. $140,589

Explanation / Answer

Answer : a) $ 339,411

Explanation : Total holding and ordering costs under two polices

TC = S(D/Q) + H(Q/2)

Decentralized

TC = 900(200,000/3000)+40(3000/2)

TC = 60000 + 60000 = 120,000

Decentralized TC for all four warehouses

= 4(120,000) = 480,000

Centralized

TC = 1800(800,000/ 8485) + 40 (8485/2)

TC = 169,711 + 169,700 = $ 33,9411

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