Reference no: EM132318564

Question 1 - Economic order quantity for retailer. Wonder Line (WL) operates a megastore featuring sports merchandise. It uses an EOQ decision model to make inventory decisions. It is now considering inventory decisions for its Los Angeles Galaxy soccer jerseys product line. This is a highly popular item. Data for 2017 are as follows:

Expected annual demand for Galaxy jerseys	9,000
Ordering cost per purchase order	$250
Carrying cost per year	$8 Per jersey

Each jersey costs WL $50 and sells for $100. The $8 carrying cost per jersey per year consists of the required return on investment of $5 (10% * $50 purchase price) plus $ 3 in relevant insurance, handling, and storage costs. The purchasing lead time is 5 days. WL is open 365 days a year.

1. Calculate the EOQ.

2. Calculate the number of orders that will be placed each year.

3. Calculate the reorder point

Question 2 - Economic order quantity, effect of parameter changes (continuation of Q1).

Sportsman Textiles (ST) manufactures the Galaxy jerseys that Wonder Line (WL) sells to its customers. ST has recently installed computer software that enables its customers to conduct "one-stop" purchasing using state-of- the-art Web site technology. WL's ordering cost per purchase order will be $ 40 using this new technology.

1. Calculate the EOQ for the Galaxy jerseys using the revised ordering cost of $ 40 per purchase order.

2. Suppose ST proposes to "assist" WL. ST will allow WL customers to order directly from the ST Web site. ST would ship directly to these customers. ST would pay $ 12 to WL for every Galaxy jersey purchased by one of WL's customers. Comment qualitatively on how this offer would affect inventory management at WL. What factors should WL consider in deciding whether to accept ST's proposal?

Question 3 - EOQ for a retailer.

The Fabric World sells fabrics to a wide range of industrial and consumer users. One of the products it carries is denim cloth, used in the manufacture of jeans and carrying bags. The supplier for the denim cloth pays all incoming freight. No incoming inspection of the denim is necessary because the supplier has a track record of delivering high-quality merchandise. The purchasing officer of the Fabric World has collected the following information:

Annual demand for denim cloth	40,700 Yards
Ordering cost per purchase order	$185
Carrying cost per year	10% of purchase cost
Safety-stock requirements	none
Cost of denim cloth	$11 per yard

The purchasing lead time is 2 weeks. The Fabric World is open 220 days a year (44 weeks for 5 days a week).

1. Calculate the EOQ for denim cloth.

2. Calculate the number of orders that will be placed each year.

3. Calculate the reorder point for denim cloth.

Question 4 - EOQ for manufacturer.

Sk8 Company produces skateboards and purchases 20,000 units of a wheel bearing each year at a cost of $ 1 per unit. Sk8 requires a 15% annual rate of return on investment. In addition, the relevant carrying cost (for insurance, materials handling, breakage, etc.) is $ 0.17 per unit per year. The relevant ordering cost per purchase order is $38.4.

1. Calculate Sk8's EOQ for the wheel bearing.

2. Calculate Sk8's annual relevant ordering costs for the EOQ calculated in requirement 1.

3. Calculate Sk8's annual relevant carrying costs for the EOQ calculated in requirement 1.

4. Assume that demand is uniform throughout the year and known with certainty so there is no need for safety stocks. The purchase-order lead time is half a month. Calculate Sk8's reorder point for the wheel bearing.

Question 5 - Sensitivity of EOQ to changes in relevant ordering and carrying costs, cost of prediction error.

Alpha Company's annual demand for its only product, XT-590, is 10,000 units. Alpha is currently analyzing possible combinations of relevant carrying cost per unit per year and relevant ordering cost per purchase order, depending on the company's choice of supplier and average levels of inventory. This table presents three possible combinations of carrying and ordering costs.

Relevant Carrying Cost per Unit per Year - $10, $20, $40

Relevant Ordering Cost per Purchase Order - $400, $200, $100

1. For each of the relevant ordering and carrying-cost alternatives, determine (a) EOQ and (b) annual relevant total costs.

2. How does your answer to requirement 1 give insight into the impact of changes in relevant ordering and carrying costs on EOQ and annual relevant total costs? Explain briefly.

3. Suppose the relevant carrying cost per unit per year was $ 20 and the relevant ordering cost per purchase order was $200. Suppose further that Alpha calculates EOQ after incorrectly estimating relevant carrying cost per unit per year to be $ 10 and relevant ordering cost per purchase order to be $400. Calculate the actual annual relevant total costs of Alpha's EOQ decision. Compare this cost to the annual relevant total costs that Alpha would have incurred if it had correctly estimated the relevant carrying cost per unit per year of $20 and the relevant ordering cost per purchase order of $ 200 that you have already calculated in requirement 1. Calculate and comment on the cost of the prediction error.

Question 6 - JIT production, relevant benefits, relevant costs. The Knot manufactures men's neckwear at its Spartanburg plant. The Knot is considering implementing a JIT production system. The following are the estimated costs and benefits of JIT production:

a. Annual additional tooling costs $250,000 annually.

b. Average inventory would decline by 80% from the current level of $ $1,000,000.

c. Insurance, space, materials-handling, and setup costs, which currently total $ 400,000 annually, would decline by 20%.

d. The emphasis on quality inherent in JIT production would reduce rework costs by 25% . The Knot cur- rently incurs $ 160,000 in annual rework costs.

e. Improved product quality under JIT production would enable The Knot to raise the price of its product by $ 2 per unit.

The Knot sells 100,000 units each year.

The Knot's required rate of return on inventory investment is 15% per year.

1. Calculate the net benefit or cost to The Knot if it adopts JIT production at the Spartanburg plant.

2. What nonfinancial and qualitative factors should The Knot consider when making the decision to adopt JIT production?

3. Suppose The Knot implements JIT production at its Spartanburg plant. Give examples of performance measures The Knot could use to evaluate and control JIT production. What would be the benefit of The Knot implementing an enterprise resource planning (ERP) system?

Question 7 - Backflush costing and JIT production. Grand Devices Corporation assembles handheld computers that have scaled-down capabilities of laptop computers. Each handheld computer takes 6 hours to assemble. Grand Devices uses a JIT production system and a backflush costing system with three trigger points:

• Purchase of direct materials
• Completion of good finished units of product
• Sale of finished goods

There are no beginning inventories of materials or finished goods and no beginning or ending work-in- process inventories. The following data are for August 2017:

Direct materials purchased	$2,958,000	Conversion costs incurred	$777,600
Direct materials used	$2,937,600	Conversion costs allocated	$806,400

Grand Devices records direct materials purchased and conversion costs incurred at actual costs. It has no direct materials variances.

When finished goods are sold, the backflush costing system "pulls through" standard direct materials cost $102 per unit and standard conversion cost $28 per unit. Grand Devices produced 28,800 finished units in August 2017 and sold 28,400 units. The actual direct materials cost per unit in August 2017 was $102, and the actual conversion cost per unit was $27.00

1. Prepare summary journal entries for August 2017 (without disposing of under- or overallocated conversion costs).

2. Post the entries in requirement 1 to T-accounts for applicable Materials and In-Process Inventory Control, Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold.

3. Under an ideal JIT production system, how would the amounts in your journal entries differ from those in requirement 1?

Question 8 - Backflush costing, two trigger points, materials purchase and sale (continuation of Q7). Assume the same facts as in Exercise 20-27, except that Grand Devices now uses a backflush costing sys- tem with the following two trigger points for making entries in the accounting system:

• Purchase of direct materials
• Sale of finished goods

The Inventory Control account will include direct materials purchased but not yet in production, materials in work in process, and materials in finished goods but not sold. No conversion costs are inventoried. Any under- or overallocated conversion costs are written off monthly to Cost of Goods Sold.

1. Prepare summary journal entries for August, including the disposition of under- or overallocated con- version costs.

2. Post the entries in requirement 1 to T-accounts for Inventory Control, Conversion Costs Control, Conver- sion Costs Allocated, and Cost of Goods Sold.

Question 9 - Backflush costing, two trigger points, completion of production and sale (continuation of Q7). Assume the same facts as in Exercise 20-27, except now Grand Devices uses only two trigger points for making entries in the accounting system:

• Completion of good finished units of product
• Sale of finished goods

The inventory account is confined solely to finished goods. Any under- or overallocated conversion costs are written off monthly to Cost of Goods Sold.

1. Prepare summary journal entries for August, including the disposition of under- or overallocated conversion costs.

2. Post the entries in requirement 1 to T-accounts for Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold.

Question 10 - EOQ, uncertainty, safety stock, reorder point.

Chadwick Shoe Co. produces and sells an excellent-quality walking shoe. After production, the shoes are distributed to 20 warehouses around the country. Each warehouse services approximately 100 stores in its region. Chadwick uses an EOQ model to determine the number of pairs of shoes to order for each warehouse from the factory. Annual demand for Warehouse OR2 is approximately 120,000 pairs of shoes. The ordering cost is $ 250 per order. The annual carrying cost of a pair of shoes is 2.4 per pair.

1. Use the EOQ model to determine the optimal number of pairs of shoes per order.

2. Assume each month consists of approximately 4 weeks. If it takes 1 week to receive an order, at what point should warehouse OR2 reorder shoes?

3. Although OR2's average weekly demand is 2,500 pairs of shoes, demand each week may vary with the following probability distribution: 120000 / 12 months / 4 weeks

Total demand for 1 week	2,000	2,250	2,500	2,750	3,000
Probability (sums to 1.00)	0.04	0.2	0.52	0.2	0.04

If a store wants shoes and OR2 has none in stock, OR2 can "rush" them to the store at an additional cost of $2 per pair.

How much safety stock should Warehouse OR2 hold? How will this affect the reorder point and reorder quantity?

Question 11 - EOQ, uncertainty, safety stock, reorder point.

Phillips Corporation is a major manufacturer of food processors. It purchases motors from Viking Corporation. Annual demand is 52,000 motors per year or 1,000 motors per week. The ordering cost is $ 360 per order. The annual carrying cost is $ 6.5 per motor. It currently takes 2 weeks to supply an order to the assembly plant.

1. What is the optimal number of motors that Phillips's managers should order according to the EOQ model?

2. At what point should managers reorder the motors, assuming that both demand and purchase-order lead time are known with certainty?

3. Now assume that demand can vary during the 2-week purchase-order lead time. The following table shows the probability distribution of various demand levels:

Total Demand for Motors for 2 Weeks	Probability of Demand (sums to 1)
1600	0.05
1800	0.2
2000	0.5
2200	0.2
2400	0.05

If Phillips runs out of stock, it would have to rush order the motors at an additional cost of $5 per motor. How much safety stock should the assembly plant hold? How will this affect the reorder point and reorder quantity?

Question 12 - MRP, EOQ, and JIT.

Tech Works Corp. produces J-Pods, music players that can download thousands of songs. Tech Works forecasts that demand in 2017 will be 48,000 J-Pods. The variable production cost of each J-Pod is $54.00 In its MRP system, due to the large $10,000 cost per setup, Tech Works plans to produce J-Pods once a month in batches of 4000 each. The carrying cost of a unit in inventory is $17.00 per year.

1. Using the MRP system, what is the annual cost of producing and carrying J-Pods in inventory? (Assume that, on average, half of the units produced in a month are in inventory.)

2. A new manager at Tech Works has suggested that the company use the EOQ model to determine the optimal batch size to produce. (To use the EOQ model, Tech Works needs to treat the setup cost in the same way it would treat ordering cost in a traditional EOQ model.) Determine the optimal batch size and number of batches. Round up the number of batches to the nearest whole number. What would be the annual cost of producing and carrying J-Pods in inventory if it uses the optimal batch size? Compare this cost to the cost calculated in requirement 1. Comment briefly.

3. Tech Works is also considering switching from its MRP system to a JIT system. This will result in producing J-Pods in batch sizes of 600 J-Pods and will reduce obsolescence, improve quality, and result in a higher selling price. Tech Works will reduce setup time and setup cost. The new setup cost will be $500 per setup. What is the annual cost of producing and carrying J-Pods in inventory under the JIT system?

4. Compare the models analyzed in the previous parts of the problem. What are the advantages and dis- advantages of each?

Question 13 - Effect of management evaluation criteria on EOQ model.

Rugged Outfitters purchases one model of mountain bike at a wholesale cost of $ 520 per unit and resells it to end consumers.

The annual demand for the company's product is 49,000 units. Ordering costs are $ 500 per order and carrying costs are $ 100 per bike per year, including $ 40 in the opportunity cost of holding inventory.

1. Compute the optimal order quantity using the EOQ model.

2. Compute (a) the number of orders per year and (b) the annual relevant total cost of ordering and carrying inventory.

3. Assume that when evaluating the manager, the company excludes the opportunity cost of carrying inventory. If the manager makes the EOQ decision excluding the opportunity cost of carrying inventory, the relevant carrying cost would be $60, not $100. How would this affect the EOQ amount and the actual annual relevant cost of ordering and carrying inventory?

4. What is the cost impact on the company of excluding the opportunity cost of carrying inventory when making EOQ decisions? Why do you think the company currently excludes the opportunity costs of carrying inventory when evaluating the manager's performance? What could the company do to encourage the manager to make decisions more congruent with the goal of reducing total inventory costs?

Question 14 - JIT purchasing, relevant benefits, relevant costs. (CMA, adapted)

The Gibson Corporation is a manufacturing company that uses automatic stamping machines to manufacture garage doors from rolled sheets of raw steel. Gibson's inventory of raw steel averages $600,000. Juan Sanchez, president of Gibson, and Jane Anderson, Gibson's controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. Anderson identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory:

Without scheduling any overtime, lost sales due to stockouts would increase by 700 units per year. However, by incurring overtime premiums of $ 90,000 per year, the increase in lost sales could be reduced to 300 units per year. This would be the maximum amount of overtime that would be feasible for Gibson.

Two warehouses currently used for rolled steel storage would no longer be needed. Gibson rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $80,000. The other warehouse is owned by Gibson and contains 20,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $2.5 per square foot per year. Insurance and property tax costs totaling $16000 per year would be eliminated.

Gibson's required rate of return on investment is 15% per year. Gibson's budgeted income statement for the year ending December 31, 2017, (in thousands) is:

Revenues	20000 units	16,000
Cost of goods sold
Variable costs	8,450
Fixed costs	3,280
Total costs of goods sold		11,730
Gross margin		4,270
Marketing and Distribution cost
Variable cost	1,045
Fixed cost	890
Total marketing and distribution costs		1,935
Operating income		2,335

1. Calculate the estimated dollar savings (loss) for the Gibson Corporation that would result in 2017 from the adoption of JIT purchasing.

2. Identify and explain other factors that Gibson should consider before deciding whether to adopt JIT purchasing.

Question 15 - Supply-chain effects on total relevant inventory cost.

Peach Computer Co. outsources the production of motherboards for its computers. It is currently deciding which of two suppliers to use: Alpha or Beta. Due to differences in the product failure rates in the two companies, 5% of motherboards purchased from Alpha will be inspected and 25% of motherboards purchased from Beta will be inspected. The following data refer to costs associated with Alpha and Beta:

	Alpha	Beta
Number of orders per year	50	50
Annual motherboards demanded	10000	10000
Price per motherboard	$108	$105
Ordering cost per order	$13	$10
Inspection cost per unit	$6	$6
Average inventory level	100	100
Expected number of stockouts	100	300
Stockout cost (cost of rush order) per stockout	$4	$6
Units returned by customers for replacing motherboards	50	500
Cost of replacing each motherboard	$30	$30
Required annual return on investment	10%	10%
Other carrying cost per unit per year	$3.50	$3.50

1. What is the relevant cost of purchasing from Alpha and Beta?

2. What factors other than cost should Peach consider?

Question 16 - Supply-chain effects on total relevant inventory cost.

Couture Jeans orders high-quality denim fabric from two different suppliers: Designer Fabrics and Cannon Cotton. Couture would like to use only one of the suppliers in the future. Due to variations in quality, Couture would need to inspect 20% of Designer's 30-yard bolts (rolls) and 30% of Cannon's. The following data refer to costs associated with the two suppliers.

	Designer	Canon
Number of orders per year	50	50
Annual motherboards demanded	2000	2000
Price per motherboard	$200.0	$195.0
Ordering cost per order	$150.0	$200.0
Inspection cost per unit	$30.0	$30.0
Average inventory level	20	20
Expected number of stockouts	10	10
Stockout cost (cost of rush order) per stockout	$20.00	$15.00
Estimated number of jeans returned by customers because of defective fabric	100	200
Cost of fixing jeans returned by customers because of defective fabric	$25	$25
Opportunity cost of investment	15%	15%
Other carrying costs per bolt per year	10	10

1. What is the relevant cost of purchasing from Designer Fabrics and Cannon Cotton?

2. What factors other than cost should Couture Jeans consider?