9. Consider the following conditions for an item used in the Hess Company\'s man
ID: 372503 • Letter: 9
Question
9. Consider the following conditions for an item used in the Hess Company's manu process On-hand inventory: Open orders (scheduled receipts): 100 units Backorders Reorder point: Quantity per order: 40 units 60 units 100 units 50 units Which of the following state replenishment? (Show your calculation for partial credit) A) No action is required, since a scheduled receipt is due to be delivered to B) To cover its backorders, Hess should order two lots of 50 units C) Because it is incurring backorders, Hess shou D) Hess should reorder point. ation regarding inventory Hess ld increase its reorder point. place an order for 50 units, since the inventory position is less than the 10. Which of the following is not a benefit of outsourcing? A) comparative labor costs B) lower logistics costs C) reduction of transaction costs through use of the Internet D) technology transfer to another country or company Part 3. Mathematical problems Problem 1 You currently make a part on old equipment at a cost of $50,000 per year and a variable cost of $20/unit. You have found an outside supplier who will make the part for $15/unit if you will pay their annual fixed costs of $200,000/year. The following table summarizes the details of this make versus buy decision. VARIABLE COST $15 per unit $20 per un FIXED COST ALTERNATIVE Bu Make 200,000 per year $50,000 per year What is the break even quantity between buying and making? What does the company save for the year by selecting the low-cost option at an annual requirement of 40,000 units? Problem 2 As an inventory manager, you must decide on the order quantity for an item. Its annual demand is 300 units. Ordering cost is $20 each time an order is placed, and the holding cost is 30 percent of the per-unit price. Your supplier provided the following price schedule. Price per Unit rder QuantityExplanation / Answer
Please find answer to first 3 questions :
Answer to question 9 :
Total available inventory position
= Open order ( scheduled receipts) + On hand inventory
= 40 + 100
= 140
Backorders which needs to be met from above quantity = 60
Hence, available inventory after meeting backorders = 140 – 60 = 80
However ,
Available inventory after meeting backorders : 80 < Reorder point 100
Hence order needs to be placed for a quantity such that 80 + Order quantity > 100. Since Order quantity has to be 50, a quantity of 50 should be ordered .
HESS SHOULD PLACE AN ORDER FOR 50 UNITS, SINCE THE INVENTORY POSITION IS LESS THAN THE REORDER POINT
Answer to question 10:
Major reason for outsourcing is cost related issue as well as improved performance parameter by outsourced agency since it is assumed that the outsourced agency performs the job in a more efficient manner.
Improvement in labour cost, logistics cost as well as transportation cost thus can be valid reasons for outsourcing.
Technology transfer to another country or company is a totally different issue and has nothing to do with issue of outsourcing.
ANSWER : TECHNOLOGY TRANSFER TO ANOTHER COUNTRY OR COMPANY
Answer to question 3.1:
Let break even quantity = N
Total cost = Fixed cost + Variable cost / unit x N units
Thus total cost of “Buy” = 200,000 +15.N
Total cost of “Make” = 50,000 + 20.N
At breakeven point total cost under both options are same.
Therefore,
200,000 + 15.N = 50,000 + 20.N
Or, 5.N = 150,000
Or, N = 30,000
BREAKEVEN QUANTITY = 30,000
For quantity = 40,000 :
Total cost of Buy = 200,000 + 15.N = 200,000 +15 X 40,000 = 200,000 + 600,000 = $800,000
Total cost of Make = 50,000 + 20.N = 50,000 + 20 X 40,000 = 50,000 + 800,000 = $850,000
Savings by selecting the low cost option = $850,000 - $800,000 = $50,000
SAVINGS BY SELECTING LOW COST PTION = $50,000
HESS SHOULD PLACE AN ORDER FOR 50 UNITS, SINCE THE INVENTORY POSITION IS LESS THAN THE REORDER POINT
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