Horizon Cellular manufactures cell phones for exclusive use in its communication
ID: 387692 • Letter: H
Question
Horizon Cellular manufactures cell phones for exclusive use in its communication network. Management must select a circuit board supplier for a new phone soon to be introduced to the market. The annual requirements are 50,000 units and Horizon’s plant operates 250 days per year. The data for three suppliers are in Table 14.3. Which supplier and shipping quantity will provide the lowest total cost for Horizon Cellular? Table 14.3 Data for Suppliers to Horizon Cellular Supplier Annual Freight Costs Shipping Quantity Price/Unit Annual Holding Cost/Unit Lead Time (Days) Annual Administrative Cost 10,000 20,000 Abbott $10,000 $7,000 $30 $6.00 4 $10,000 Baker $12,000 $9,000 $28 $5.60 7 $12,000 Carpenter $9,000 $6,500 $31 $6.20 3 $9,000
Explanation / Answer
Total annual cost = Annual freight cost + Item Cost + Annual holding cost of cycle stock and transit stock + Annual administrative cost
Abott
Total annual cost of supplier Abbott for order quantity of 10000
= 10000 + 30*50000 + (10000/2)*6 + 50000*(4/250)*6 + 10000
= $ 1,554,800
Total annual cost of supplier Abbott for order quantity of 20000
= 7000 + 30*50000 + (20000/2)*6 + 50000*(4/250)*6 + 10000
= $ 1,581,800
Baker
Total annual cost of supplier Baker for order quantity of 10000
=12000+28*50000+(10000/2)*5.6+50000*(7/250)*5.6+12000
= $ 1,459,840
Total annual cost of supplier Abbott for order quantity of 20000
=9000+28*50000+(20000/2)*5.6+50000*(7/250)*5.6 +12000
= $ 1,484,840
Carpenter
Total annual cost of supplier Carpenter for order quantity of 10000
=9000+31*50000+(10000/2)*6.2+50000*(3/250)*6.2+9000
= $ 1,602,720
Total annual cost of supplier Abbott for order quantity of 20000
=6500+31*50000+(20000/2)*6.2+50000*(3/250)*6.2+9000
= $ 1,631,220
Lowest total annual cost is $ 1,459,840 pertaining to supplier Baker and for quantity = 10000
Supplier Baker and shipping quantity of 10000 will provide the lowest total cost for horizon Cellular.
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