Question

6-29. Upon hearing that Ross White (see Problems 6-27 and 6-28) is considering producing the brackets in-house, the vendor has notified Ross that the purchase price would drop from $15 per bracket to $14.50 per bracket if Ross would purchase the brackets in lots of 1,000. Lead times, however, would increase to 3 days for this larger quantity. A) What is the total annual inventory cost plus purchase cost if Ross buys the brackets in lots of 1,000 at $14.50 each? B) If Ross does buy in lots of 1,000 brackets, what is the new ROP? C) Given the options of purchasing the brackets at $15 each, producing them in-house at $14.80, and taking advantage of the discount, what is your recommendation to Ross White?

Answer in EXCEL

Answer 1

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Answer

A. Average Inventory = 1000/2 = 500 Average Inventory holding Cost = 500 * 0.1 * 14.5 = 725 Annual Ordering Cost = (2500 * 18.75)/ 1000 = 46.875$ Annual Purchase Cost = 2500 * 14.5 = 36250$ Therefore, Total annual inventory cost plus purchase cost if Ross buys the brackets in lots of 1,000 at $14.50 each = 725$ + 46.875$ + 36250$ = 37021.88$

(B) New ROP = Lead Time * Demand (3/365) * 2500 = 20.5479 units =

C) Total inventory cost for Ross White in each of the 3 cases are: Purchasing the brackets at $15 each = (250*1.5) / 2 + (2500 / 250) * 18.75 + 2500*15 = 187.5+187.5+2500*15= $37875 • Producing them in-house at $14.80 = (25*1000)/291 + (291*1.48)/2 + 2500 * 14.8 = 85.91 + 215.34 + 37000 = $37301.25 • Taking advantage of the discount @ $14.50 = 37021.88$ With the 3 options it is now clearly visible that for Ross Option (3), ie, Taking advantage of the discount @ $14.50 is the best option.