Wintel, Inc. manufactures and sells desktops and notebooks. All components of th
ID: 432472 • Letter: W
Question
Wintel, Inc. manufactures and sells desktops and notebooks. All components of the computers, with the exception of monitors, are produced in the company. The monitors are purchased from Bay Electronics Co. The company's annual requirements total 24,000 units, and the price per unit is $60. Wintel does not purchase in greater quantities because Bay Electronics, the supplier, does not offer quantity discounts. There are practically no shortages of monitors because Bay Electronics always meets the delivery schedule. Associated with the purchase of each shipment is the ordering cost of $1000 per order. In addition to ordering cost, incurs inventory carrying cost that is equal to $300 per unit per year. Beginning in August of this year, management of Wintel, Inc. will embark on a company-wide cost control program in an attempt to improve its profits. One of the areas to be closely scrutinized for possible cost savings is inventory planning. One of the alternatives will be to evaluate the effectiveness of the current system of purchasing monitors, improve the current system, and continue purchasing monitors with improved inventory policy. However, over the past few months, the company's production capacity has been expanded. As a result, excess capacity is now available in certain production departments, and management is also considering the alternative of producing monitors inside the company. The production capacity (production rate) for monitors is available at the rate of 800 monitors weekly. It is felt that with a two-week lead time, schedules can be arranged so that the product can be produced whenever needed. All parameters of this production will be constant; shortages will not be allowed; production costs are expected to be $65 per monitor; and setup cost is $750 per set up of equipment for producing monitors.
1.Identify Wintel’s optimal inventory policy of outsourcing monitors from Bay Electronics Co. You need to calculate the optimal order quantity and annual total cost of inventory. Explain your results.
2.In case Wintel starts to produce monitors internally, identify the best inventory policy by calculating the optimal order quantity and annual total cost of inventory. Explain your results. (Hint: consider that the Wintel operates all 52 weeks a year).
3.Make a recommendation as to whether the company should outsource (purchase) monitors from Bay Electronics Co. or to produce them internally. What is the savings associated with your recommendation as compared with the other option described?
Explanation / Answer
1)Optimal order quantity=[2*(annual usage*set up cost)/annual carrying cost per unit]^1/2
[2*(24000*1000)/300]^1/2
=400
annual total cost for inventory=C(Q/2)+F(D/Q)
300(24,000/2)+1000(24000/24000)
=3,601,000
The demand for the product remains constant.
The unit price of the good and the holding cost per unit is the same.
The setup cost remains constant and each order arrives instantly.
There are no cost savings that are associated with placing multiple orders at once
2)Optimal order quantity=[2*(annual usage*set up cost)/annual carrying cost per unit]^1/2
[2*(24,000*750)/0]^1/2
=6,000
annual total cost for inventory=C(Q/2)+F(D/Q
0(800/2)+750(24000/800)
=22,500
The product demand is constant
the set up cost remains fixed.
The unit price is the same
3)the company should produce its own monitors because it is somehow cheaper and save $3,578,500. This results from the carrying costs that were being incurred and the higher amount of order which is reduced in producing their own.
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