Question

A manager is going to purchase new processing equipment and must decide on the number of...

A manager is going to purchase new processing equipment and must decide on the number of spare parts to order with the new equipment. The spares cost $170 each, and any unused spares will have an expected salvage value of $40 each. The probability of usage can be described by this distribution:

Number 0 1 2 3
Probability .05 .40 .20 .35


If a part fails and a spare is not available, 2 days will be needed to obtain a replacement and install it. The cost for idle equipment is $550 per day. What quantity of spares should be ordered?

a. Use the ratio method. (Round your answer to 2 decimal places.)

Service level is  , so we need to order  Spares.
  
b. Use the tabular method.

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Cost of Stock out Cs = 550*2 = 1100

Cost of Excess Inventory Ce= 170 - 40 = 130

Service Level = Cs/(Cs+Ce)

Service Level = 1100/(1100+130)

Service Level = 0.8943

Below is the probability table -

Number Probability Cumulative Probability
0 0.05 0.05
1 0.4 0.45
2 0.2 0.65
3 0.35 1

0.8943 lies between, 0.65 and 1, Hence

Number of Spare = 3

2)

Tabular Method -

Below is the calculation performed as per tabular method -

Demand = 0 Demand = 1 Demand = 2 Demand = 3
Stocking Level 0.05 0.4 0.2 0.35 Expected Cost
0 0 440 440 1155 2035
1 6.5 0 220 770 996.5
2 13 52 0 385 450
3 19.5 104 26 0 149.5

Cost is lowest with 3 spare parts, hence 3 spare parts should be ordered.

Add a comment
Know the answer?
Add Answer to:
A manager is going to purchase new processing equipment and must decide on the number of...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Problem 13-41 A manager is going to purchase new processing equipment and must decide on the...

    Problem 13-41 A manager is going to purchase new processing equipment and must decide on the number of spare parts to order with the new equipment. The spares cost $182 each, and any unused spares will have an expected salvage value of $52 each. The probability of usage can be described by this distribution: Number 0 Probability .05 1 .40 2 .20 3 .35 If a part fails and a spare is not available, 2 days will be needed to...

  • Consider the following situation, in which the financial manager must decide whether to acquire new equipment...

    Consider the following situation, in which the financial manager must decide whether to acquire new equipment that costs 55,000 and requires an outlay of 5000 to install. To make the decision, the financial manager must determine cash flow generated by the investment. The 5000 installation charge is a current cash outflow that is recaptured over the same five years that the equipment is depreciated. Estimated annual operating earnings generated by the equipment are 17,200 before the annual depreciation expense. In...

  • 10. Company Z is considering adding a new piece of equipment which will produce a new...

    10. Company Z is considering adding a new piece of equipment which will produce a new product. The machine would be set up in unused space in Ace's plant. The will cost $288,000. It would cost $33,000 for shipping. $20,000 for a contract base for the machine, $12,000 for contractors to install the machine. Additionally, electric is installed at a cost of 24,000 and another $5,000 for electric for an adjacent machine which is not used to process the new...

  • A new car dealer offers three packages of optional equipment for a particular model. There is an automatic transmission...

    A new car dealer offers three packages of optional equipment for a particular model. There is an automatic transmission package, with a profit of $200 to the dealer, an air- conditioning package, with a profit of S150, and an interior décor package, with a profit of $100. Data indicate that 80% of customers order the automatic transmission package; 60% of customers who order the automatic transmission package, also order the air- conditioning package. 50% of customers who do not order...

  • NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department....

    NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $190,000, and it would cost another $28,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $85,500. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $9,000 increase in net operating working capital (spare parts inventory). The...

  • NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department....

    NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $110,000, and it would cost another $27,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $55,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $11,000 increase in net operating working capital (spare parts inventory). The...

  • NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department....

    NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $190,000, and it would cost another $28,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $76,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $12,000 increase in net operating working capital (spare parts inventory). The...

  • NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department....

    NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $230,000, and it would cost another $34,500 to modify the equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $115,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $12,000 increase in net operating working capital (spare parts inventory). The...

  • Office Automation Inc., has developed a proposal for introducing a new computerized office system that will...

    Office Automation Inc., has developed a proposal for introducing a new computerized office system that will improve word processing and interoffice communications for a particular company. Contained in the proposal is a list of activities that must be accomplished in order to complete the new office system project. Information about the activities is shown in the table below. Times are in weeks. Data for Office Automation, Inc. Activity Description Immediate Predecessors Normal Time Crash Time Normal Cost ($) Crash Cost...

  • NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department....

    NEW PROJECT ANALYSIS You must evaluate the purchase of a proposed spectrometer for the R&D department. The base price is $300,000, and it would cost another $75,000 equipment for special use by the firm. The equipment falls into the MACRS 3-year class and would be sold after 3 years for $120,000. The applicable depreciation rates are 33%, 45%, 15%, and 7%. The equipment would require a $11,000 increase in net operating working capital (spare parts inventory). The project would have...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT