A company is in the situation summarized below with one of its key products that

Question

A company is in the situation summarized below with one of its key products that it acquires from one of its key vendors. Please answer the questions presented below but be sure to show all of your work (arithmetic formulas) so that partial credit can be assigned to you. FINISH THIS IN 60 MINUTES Your firm buys this product for S100 and sells it to your customers for a 40% gross margin. What is your annual gross profit margin on sales of this product? Use the data provided above. WRITE DOWN THE PRICE YOU CALCULATE TO USE IN SUBSEQUENT QUESTIONS. What for this firm and this product is the EOQ quantity? If all goes as planned (sales, lead times, etc.), how many orders per year will be placed for this product? Calculate for this product what the annual ordering and carrying costs would be if the EOQ model is applied. Order Costs = Carry Costs = Given there are 365 days in a year, what would be the order interval in days or time between each order placement? The seller of this product to your firm wants your firm to order in a larger quantity fewer times each year. The sales representative asks you to increase your order by 25%. You should multiply the EOQ you calculated above by 1.25 to find that number. In return for your placing larger orders less frequently, the seller offers you a 10% discount off of the price of $50. Calculate the amounts of ordering and carrying costs your firm will experience if you accept this offer. How much would your firm save on the annual costs of goods sold to purchase this product at the discounted price and sold at the original price you calculated in Part a above? What would be your firm's gross margin percentage (%) on sales of products that cost $95 each and sell for the price you calculated in Part a above? Would it be more profitable for your company to take the discounted vendor price (your cost) and keep your selling price the same level calculated in Part a or pass the savings on to your customers? Your current selling price was calculated in Part a. Your marketing research department has determined that your unit sales would rise from 20,000 to 23,000 units if you lowered your selling price to your customers and pass the $5 per unit savings to your customers as a price discount. How would that affect your company s sales revenues and gross profits?

Explanation / Answer

Question a. Annual Demand in units 20000 Purchase price $            100.00 Gross Profit @40% on sales (100/0.60 x 40%)                  66.67 Sales Price                166.67 Question b. Formula is, EOQ = squire root(2 x A x O / c) Here EOQ = Economic Order Quantity, A = Annual Demand = 20,000 units O= Ordering cost per order = 500, and C = Carrying cost = 100 x 30% = $30 So, EOQ = square root(2 x 20000 x 500/30) There EOQ = 817 units Question c. No of Order = 20000/817 = 24.48 answer 25 orders Question d. Order cost = 25 x 500 = $12,500 Carrying Cost = 817/2*30=12,255 Total Cost= (12500+12255) = 24,755 Question e. Order interval = 365/No of Orders 14.6 Days Question f. New Order quantity 1021 Ordering cost (20000/1021 x 500)            9,791.92 Carrying cost (1021/2*30)          15,318.75 Total Cost          25,110.67 Less: Cost at EOQ          24,755.00 Incremental Cost                      356 Discount on purchase (20000 x 50 x 10%)              100,000                99,644 Offer should be accepted. Question g. Annual cost savings = 100000-356 = 99,644

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