Chapter 17 - Finman PDF

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CHAPTER 17INVENTORY MANAGEMENTSTRAIGHT PROBLEMS1. Benefits of efficiency in inventory management. To reduce production start-up costs, Marlen Corporation may manufacture longer runs of the same track. Estimated savings from the increase efficiency are P260,000 per year. However, inventory turnover w...

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CHAPTER 17 INVENTORY MANAGEMENT STRAIGHT PROBLEMS 1. Benefits of efficiency in inventory management. To reduce production start-up costs, Marlen Corporation may manufacture longer runs of the same track. Estimated savings from the increase efficiency are P260,000 per year. However, inventory turnover will decrease eight times a year to six times a year. Cost of goods sold are P48 million on an annual basis. Required: If the required rate of return of investment in inventories is 15%, should the company implement the new production plan? 2. Economic Order Quantity. Lito Corporation has been buying product A in lots of 1,200 units which represents a four month’s supply. The cost per unit is 220. The order cost is P200 per order; and the annual inventory carrying cost per one unit is P25. Assume that the units will be required throughout the year. Required: Calculate the following: 1. 2. 3. 4.

Economic Order Quantity Number of orders per year. Average inventory based on economic order quantity. Total carrying cost, ordering costs, and relevant inventory costs at economic order quantity.

3. EOQ Tabular analysis, EOQ Graphs. Mel Corporation buys a certain part of its manufacturing process for P20 part. Sixteen thousand parts a year are needed. It costs P3 a year to carry one of these parts in inventory. The cost of placing a purchase order for these parts is P15. Assume that the parts will be required evenly throughout the year. Required: 1. Compute the economic order quantity. 2. Prepare a tabular analysis to compute the total relevant inventory costs assuming the following order sizes: 6,400 units, 1,600 units, 400 units, 200 units, and 100 units. The table should have the following columns: order size, number of orders, cost per order, total ordering costs, average inventory, carrying cost per unit, total carrying costs, and total relevant inventory costs (where “total relevant inventory costs = total ordering costs and total carrying costs). 3. Graph the behaviour of the ordering costs, carrying costs, ad total relevant inventory costs. Based on the graph, identify the economic order quantity. 4. Economic Production Quantity. Pabs Corporation needs 40,000 units of Material XC in a year. The average carrying costs per unit of material is P5 and the set-up cost per production run is P40. The units are used evenly throughout the period. Required: Calculate the following: 1. 2. 3. 4.

Economic production run. Number of production set-ups in a year. Average inventory based on economic production quantity. Total set-up cost, carrying cost and relevant inventory costs at economic production quantity.

5. Ecomic Order Quantity. Treat each of the cases below independently. Units are used evenly during the period. 1. Kiss Corporation buys baseballs with the following relevant data: Purchase price per unit P 20 Cost per purchase order P 10 Annual baseballs requirement 36,000 units Desired return on investment 10% Rent, insurance, taxes, etc. P 0.40

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Determine the economic order quantity. 2. Ruel V. Company manufactures bookcases. Set-up costs are P2.00. Mercury manufactures 4,000 bookcases evenly throughout the year. Using the economic order quantity approach, the optimal production run would be 2,000 bookcases. Determine the cost of carrying one bookcase. 3. Manila Company manufactures dolls. The cost of carrying one doll in inventory for one year is P0.60. Manila manufactures 6,000 dolls evenly throughout the year. Using the economic order quantity approach, the optimal production run would be 200. What is the set-up cost per production run? 4. A company uses 10,000 units of a product per year at a unit cost of P1.00. The cost per order is P25 and carrying cost is 12 ½ % of average inventory. How many units must be placed each year? 5. A company incurred a cost of P200 per order for the trucking, delivery and relevant clerical costs, and annual carrying costs of 20% average inventory. Monthly usage at cost amount toP3,000. What is the economic order to be placed each year? 6. The Magic Corporation has determined through an analysis of accounting data that the manufacturing cost per order of a raw material is P30. The company expects to use P60,000 of this materials in the coming year. Its carrying charge is 10% of inventory. How many times should the raw material be ordered in the coming year? 7. Tranx Corporation uses 400 units per year of Material X. Constant production levels are maintained throughout the year. Material X costs P5 per unit. The cost of placing an order is P8, and carrying costs are estimated 20% of average inventory. Compute the economic order quantity. 6. Reorder point, lead time quantity, safety stock quantity. Treat each of the cases below independently. 1. The following information is available for Butgong Company’s Material AG-190: Annual usage Working days per year Normal lead time in working days Maximum lead time in working days Required: 1. 2. 3.

10,000 units 250 days 30 days 70 days

Compute the following: Lead time quantity. Safety stock quantity. Reorder point.

2. Free Style Corporation makes available the following information relative to its Material GR-111. Annual Demand Working days in a year Normal lead time Maximum lead time Maximum usage per working day Economic order size

30,000 units 300 days 12 days 19 days 125 units 6,000 units

Required: Calculate the following: 1. Lead time quantity. 2. Safety stock quantity. 3. Reorder point. 4. Average inventory. 3. Shello Company sells 60,000 units of Product Y annually. Sales are fairly uniform throughout the year. Normal lead time for the item is 10 days. Assume 300 working days during the year, what is the lead time usage? 4. The Bird Corporation, your client, wants to determine the reorder point for product C. Normal lead time for this product is 600 units, and a safety stock of 300 units is required. What is the reorder point?

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5. The Mouse Company uses about 10,000 units of material Z during a 250-day production year. Maximum and minimum usages are 55 and 25 units per day, respectively. Normal lead time is 20 days from the date a purchase is initiated. Compute the minimum reorder point of material Z. 7. Safety Stock and Reorder Point. The following information relates to Crown Corporation’s material TEP: Annual usage in units Working days per year Normal lead time in working days Maximum lead time in working days

7,200 240 20 45

Assuming that the unit of material will be required evenly throughout the year, determine the safety stock and order point. 8. Economic Order Quantity. Volcano Company is a distributor of air filters to retail stores. It buys filters from several manufacturers. Filters are ordered in lot sizes of 1,000 and each order costs P40 to place. Demand from retail stores is 20,000 filters per month and carrying cost is P0.10 per month. Required: 1. What is the optimal order quantity with respect to so many lot sizes? 2. What would be the optimal order quantity if the carrying costs were P0.05 a filter per month? 3. What would be the optimal order quantity if ordering costs were P10? 9. Economic order quantity with constant quantity discount. Hello Corporation orders 50,000 units of products a year. Its average carrying cost per unit is P4 and its cost per order is P2.50. Determine the economic order quantity assuming a supplier is giving Hello a: 1. 5% cash discount on merchandise purchases. 2. 5% volume discount on merchandise purchases. 10. Economic order quantity, variable quantity discount. Yame Company buys 4,000 units of product Regs per year. It pays P10 per order and carries its inventory at P2 per unit per annum. Yame buys product Regs at P20 per unit. A supplier is offering Yame the following quantity discount: Order Size (units) 4000 2000 – 3,999 1000 – 1,999 500 – 999 200 – 499 100 – 199 1 – 99

Quantity Discount 10% 7 5 4 3 2 nil

Required: 1. Compute the total relevant inventory costs under each of the following orders sizes: 2,000 units; 1,000 units; 500 units; 250 units; and 125 units. Which order size gives the lowest inventory costs? 2. What is the effect of variable quantity discount in determining the economic order quantity? 11. Cost effects of deviation from economic order quantity. The Moonshire Corporation currently purchases its raw materials at economic order level. The material cost is P50 per unit and the company carries its average inventory at 10% per unit cost. It incurs cost per order at P30 and uses 67,500 raw materials annually. Its supplier has offered a 2% discount on all purchases if the company buys on a quarterly basis. Required: 1. Compute the economic order quantity. 2. Determine the net savings if Moonshire Corporation accepts the supplier’s offer to buy on a quarterly basis.

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12. Economic order quantity and cash discount. Sprit Company purchases 100,000 boxes of a product every 60 days. A company study estimated order costs for this inventory item is P250 per order and carrying costs of 80 cents per box. Required: 1. Estimate the optimal reorder point. 2. The supplier gives Sprit a trade discount of 5 centavos per box for purchases of 20,000 box lots or more. Should this order volume be adopted by Sprit Company? 13. Ordering and carrying costs, EOQ, quantity discount. George Company buys 500 boxes of items X-100 every two months. Order costs are P380 per order; carrying costs are P1 per unit and vary directly with inventory investment. Currently, the company purchases the item for P5 each. Required: 1. Determine the total ordering and carrying costs under current policy. 2. Determine the economic order quantity and the related ordering and carrying costs. 3. What is the order optimal size if the supplier offers a 5% discount for orders of 3,000 units? 14. Optimum safe stock. The Starr Company distributes a wide range of electrical products. One of its best-selling items is a standard electric motor. The management of Starr Company uses the economicorder-quantity (EOQ) decision model to determine the optimum numbers of motors to order. Management now wants to determine how much safety stock to hold. Starr Company estimates annual demand (300 working days) to be 30,000 electric motors. Using the EOQ decision model, the company orders 3,000 motors at a time. The lead time for an order is five days. The annual carrying costs of one model in safety stock is P10. Management has no estimated that the stock out costs are P20 for each motor they are short. Starr Company has analyzed the demand during 200 past reorder points. The records indicate the following patterns: Demand during lead time 440 460 480 500 520 540 560

Number of time quantity was demanded 6 12 16 130 20 10 6 200

Required: 1. Determine the level of safety stock for electric motors that Starr Company should maintain in order to minimize expected stock out costs and carrying costs. When computing carrying costs, assume that safety stock is on hand at all times and that there is no overstocking caused by decreases in expected demand. (Consider safety stock levels at 0, 20, 40, and 60 units.) 2. What would be Starr Company's new reorder point? 3. What factors should Starr Company have considered in estimating the stock out costs? 15. Economic order quantity. Compute the economic order quantity for each of the independent cases below. Round all answers to the nearest whole numbers. 1. Stevens, Inc., has an annual usage of 100 units of item M, having a purchase price of P55 per unit. The following data are applicable to item M: Ordering cost P5 per order Carrying cost percentage 15% 2. Lee Equipment Company estimates a need for 2,250 units of Anlox next year at a cost of P3 per unit. The estimated carrying cost is 20%, and the cost to place an order is P12.

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3. Tunnel Corporation has been buying a product A in lots of 1,200 units, which represents a four-month supply. The cost per unit is P100; the order cost is P200 per order; and the annual inventory carrying cost for one unit is P25. 16. Safety stock, reorder point. Cheng Cheng Company's usage of Material A is 9,600 units during 240 working days per year. Normal lead time and maximum lead time are 20 working days and 30 working days, respectively. Assuming Material A will be required evenly throughout the year, what is the safety stock and the order point? 17. Order point. Pilot Company has obtained the following costs and other data pertaining to one of its materials: Order quantity Normal use per day Maximum use per day Minimum use per day Lead time

3,500 units 500 units 600 units 100 units 5 days

Required: Compute the following: 1. Safety stock (maximum). 2. Order point. 3. Normal maximum inventory. 4. Absolute maximum inventory. 18. Order point. The James Company is setting up an inventory control system. For one type of material, the following data have been assembled: Order quantity Normal use per day Maximum use per day Minimum use per day Lead time

3,000 units 80 units 120 units 200 units 12 days

Required: Compute the following: 1. Safety stock (maximum). 2. Order point. 3. Normal maximum inventory. 4. Absolute maximum inventory. 19. Safety stock. Sunny Company would like to determine the safety stock it needs to maintain for a product, to incur the lowest contribution of stock out cost and carrying cost. Each stock out costs P75; the carrying cost for each safety stock unit is P1; the product is ordered five times a year. The following probabilities of running out of stock during an order period are associated with various safety stock levels: Safety Probability Stock level of stock out 10 units 40 % 20 20 40 8 80 4 Required: Determine the combined stock out and safety stock carrying costs associated with each level and the recommended level of safety stock. 20. EOQ, safety stock. Sarap Company sells a number of products to many restaurants in the area. One product is a special meat cutter with a disposable blade. Blades are sold in a package of 12 at P20 per package. It has been determining that the demand for the replacement blades is at a constant rate of 2,000 packages per month. The packagers cost the company P10 each, from the manufacturer and require a three-day lead time from date of order to date of delivery. The ordering cost is P1.20 per order, and the carrying cost is 10% per year. The company uses the economic order quantity formula.

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Required: 1. Compute the economic order quantity. 2. Compute the number of orders needed per year. 3. Compute the cost of ordering and the carrying blades for the year. 4. Determine the number of days until the next order should be placed, assuming that there is no safety stock and that the present inventory level is 400 packages. (360 days = 1 year) 5. Discuss the difficulties that the most firms have in attempting to apply EOQ formula to their inventory problems. 21. Order point, inventory levels. Pow Company has developed the following figures to assist in controlling one of its inventory items: Minimum daily use 150 units Normal daily use 200 units Maximum daily use 230 units Working days per year 200 Lead time in working days 10 Safety stock 300 units Cost of placing an order P80 Order quantity 4,000 units Required: Compute the following: 1. Order point. 2. Normal maximum inventory. 3. Absolute maximum inventory. 4. Assuming demand is uniform and the EOQ formulas applicable, determine the cost of storing one unit for one year. 22. Safety stock. For product 6F, ordered five times per year, stock out cost per year occurrence is P180 and safety stock carrying cost is 3 per unit. Available options are: Units Probability of running Of safety stock out of safety stock 10 50 % 20 40 30 30 40 20 50 10 55 3 Required: Compute the safety stock resulting in the lowest cost. 23. EOQ, safety stock. Tomas Perez, general manager for TP Desk Company, is exasperated because its finished goods inventory of Style 103-Modern Desk twice during the previous month. This led to customers’ complaints and disrupted the normal flow of operations. "We ought to be able to plan better," declared Perez during a presentation of this finding to management. "Our annual sales demand is 18,000 units for this model or an average of 75 desks per day based upon our 240-day work year. Unfortunately, the sales pattern is not this uniform. Our daily demand for that model varies considerably. If we do not have units on hand when a customer places an order, 35% of the time we lose the sale, 40% of the time we pay an extra charge of P24 per unit to expedite shipping when the units becomes available, and 25% of the time the customer accepts a back order at no out-of-pocket cost to us. A lost sale reduces the contribution to profit by P60." "Perez displayed the following chart, showing the weighted average (sometimes called expected value) cost of a stock out on a given day" 75 desks per day x P60 x 35% P 1,575 75 desks per day x P24 x 40% 720 Back order (no out-of-pocket costs) x 25% 0 Stock out cost P 2,295 "When we run out of unit," he continued, "we cannot convert the production line immediately, because we disrupt the production of our products and cause cost increases. The setup process for this model on any stock out day inevitably results in the destruction of 12 finished desks, leading no salvageable materials.

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Once we get the lineup, we can produce 200 units per day. I would prefer to have several planned runs of a predetermined, uniform quantity rather than the short unplanned runs we have often used to meet unfilled customers’ orders." The manager of the Cost Accounting Department suggested that they use an EOQ model to determine optimum production runs and then establish a safety stock to guard against stock outs. The cost data for Modern Desks that sells for P110 are taken from the accounting records as follows: Direct materials P 30.00 Direct labor (2 DLH @ P7.00) 14.00 Factory overhead: Variable (2 DLR @ P3.00) 6.00 Fixed (2 DLR @ P5.00) 10.00 Total manufacturing cost P 60.00 The Cost Accounting Department estimates that the company's carrying costs are 19.2% of the incremental out-of-pocket manufacturing costs. This percentage can be broken down into a 10.8% variable rate and an 8.4% fixed rate. Required: 1. TP Desk Company believes that it can be sold part of its production scheduling problems by adapting the EOQ model to determine the optimum production run. a. Explain what costs the company will be attempting to minimize when it adapts the EOQ model to production runs. b. Using the EOQ model, calculate the optimum quantity that TP Desk Company should manufacture in each production run of Style 103-Modern Desk. c. Calculate the number of production runs of Modern Desks the TP Desk Company should schedule during the year based on the optimum quantity calculated in requirement 1b. 2. TP Desk Company should establish a safety stock level to guard against stock outs. a. Explain the factor that affects the desired size of the safety stock for any inventory item. b. Calculate the minimum safety stock level that TP Desk Company could afford to maintain for Style 103-Modern Desk and not be worse off than it is unable to fill orders equal to an average day's demand. 24. Production batch size EOQ. Clyde Peterson, general manager of Adam Furniture Company, is upset because the company exhausted its finished goods inventory of style 103- Modern desk twice during the previous month. These stock outs lead to customer complaints and disrupted the normal flow of operations. “We should plan better”, declared Peterson. “Our annual sales demand 18,000 units for this model or an average of 75 desks per day based upon our 240-day work year. Unfortunately, the sales pattern is not uniform. Our daily demand on that model varies considerably. When we run out of units, we cannot convert immediately because we would disrupt the production of our products and costs increases. The setup process for this model costs 600. Once we get the line-up, we can produce 200 units per day. I would prefer to have several pla...