Your company assembles five different models of a motor scooter that is sold in

Question

Your company assembles five different models of a motor scooter that is sold in specialty stores in the United States. The company uses the same engine for all five models. You have been given the assignment of choosing a supplier for these engines for the coming year. Due to the size of your warehouse and other administrative restrictions, you must order the engines in lot sizes of 1,040 units. Because of the unique characteristics of the engine, special tooling is needed during the manufacturing process for which you agree to reimburse the supplier. Your assistant has obtained quotes from two reliable engine suppliers and you need to decide which to use. The following data have been collected: Requirements (annual forecast) 12,480 units Weight per engine 25 pounds Order processing cost $ 215 per order Inventory carry cost 20 percent of the average value of inventory per year RDER QUANTITY SUPPLIER 1 UNIT PRICE SUPPLIER 2 UNIT PRICE 1 to 1,499 units/order $ 556 $ 554 1,500 to 2,999 units/order 552 554 3,000 + units/order 550 548 Tooling costs $ 25,900 $ 22,000 Distance 115 miles 100 miles Truckload (42,000 lbs. each load): $0.80 per ton-mile Less-than-truckload: $1.20 per ton-mile Calculate the total cost for each supplier. (Round your answers to the nearest whole number.) f you could move the lot size up to ship in truckload quantities, calculate the total cost for each supplier. (Do not round intermediate calculations. Round "Required lot size for truckload" and final answers to the nearest whole number.) HINT: Use (full) truckload cost rates and the lowest (feasible) unit cost for all calculations. For example, if there are 8.3 orders per year, don’t split the 8.3 orders into 8 full truckloads and 0.3 less-than-truckloads - use the full truckload rate for all 8.3 orders. For annual purchase cost, don’t use two different unit costs for the 8 complete orders and the 0.3 partial orders – use the lowest (feasible) unit cost for all 8.3 purchase orders based on the lot size needed for a full truckload.

Explanation / Answer

Let us rewrite the information given and give table names to each set of significant information Table A Order Lot Size Recommended 1040 units Total Annual Requirement 12480 units Weight Per Engine 25 pounds Order Processing Cost 215 $/order Inventory Carrying cost 20 % of the average value of inventory per year Table B Order Quantity Supplier 1 Unit Price Supplier 1 Unit Price Units per order $ per unit $ per unit 1 to 1499 556 554 1500 to 2999 552 554 Greater than equal to 3000 550 548 Table C Other information Supplier 1 Supplier 2 Tooling Costs $ per unit of tool 25900 22000 Distance (Miles) 115 100 Table D Freight Cost Truck Load Less than truck load $ per tonne mile 0.8 1.2 Now using all the tables given above let us calculate the total costs for each supplier Supplier 1 Supplier 2 Recommended Lot Size from table A Units 1040 1040 E Annual requirement from table A Units 12480 12480 F Total number of orders to be placed Numbers 12 12 G=F/E Order Processing Cost $/order 215 215 H Total annual order processing cost $ 2580 2580 I Recommended price per unit from table B $/unit 556 554 J Average Inventory Maintained units 520 520 K=E/2 Annual average inventory carrying cost from Table A % of the average value of inventory per year 20 20 L Total annual inventory carrying cost $ 57824 57616 M=J*K*L/100 Total annual product cost $ 6938880 6913920 N=J*F Tooling Costs from Table C $ 25900 22000 O Weight per engine pounds 25 25 P Total weight per lot pounds 26000 26000 Q=P*E Total weight per lot Tonnes 11.793 11.793 R=Q/2204.6 2204.6 is a conversion from pounds to tonnes Freight cost from Table D $ per tonne miles 1.2 1.2 S Weight per lot is less than truck load Distance from supplier's end from table C miles 115 100 T Total annual freight cost $ 19529.21 16981.92 U=T*S*R*G Total cost from each supplier $ 7044713.21 7013097.92 V=I+M+N+O+U If we go by the lot size recommended Supplier 2 is cheaper and is recommended Now let us move the lot size to truck load Number of units to be bought per lot in truck load 1680 (Truck load weight in pounds divided by weight per unit in pound = 42000/25=1680) Now let us insert this quantity in the above table Supplier 1 Supplier 2 Recommended Lot Size from table A Units 1680 1680 E Annual requirement from table A Units 12480 12480 F Total number of orders to be placed Numbers 7.43 7.43 G=F/E Order Processing Cost $/order 215 215 H Total annual order processing cost $ 1597.14 1597.14 I Recommended price per unit from table B $/unit 552 554 J Average Inventory Maintained units 840 840 K=E/2 Annual average inventory carrying cost from Table A % of the average value of inventory per year 20 20 L Total annual inventory carrying cost $ 92736 93072 M=J*K*L/100 Total annual product cost $ 6888960 6913920 N=J*F Tooling Costs from Table C $ 25900 22000 O Weight per engine pounds 25 25 P Total weight per lot pounds 42000 42000 Q=P*E Total weight per lot Tonnes 19.05 19.05 R=Q/2204.6 2204.6 is a conversion from pounds to tonnes Freight cost from Table D $ per tonne miles 0.8 0.8 S Distance from supplier's end from table C miles 115 100 T Total annual freight cost $ 13019.31 11321.14 U=T*S*R*G Total cost from each supplier $ 7022212.46 7041910.29 V=I+M+N+O+U Now supplier 1 is cheaper than supplier 2 and is recommended

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