6-27 Ross White’s machine shop uses 2,500 brackets during the course of a year,

Question

6-27 Ross White’s machine shop uses 2,500 brackets during the course of a year, and this usage is relatively constant throughout the year. These brackets are purchased from a supplier 100 miles away for $15 each, and the lead time is 2 days. The holding cost per bracket per year is $1.50 (or 10% of the unit cost) and the ordering cost per order is $18.75. There are 250 working days per year.

6-28 Ross White wants to reconsider his decision of buying the brackets and is considering making the brackets in-house. He has determined that setup costs would be $25 in machinist time and lost production time, and 50 brackets could be produced in a day once the machine has been set up. Ross estimates that the cost (including labor time and materials) of producing one bracket would be $14.80. The holding cost would be 10% of this cost..

6-29 Upon hearing that Ross White (see Problems 6-27 and 6-28) is considering producing the brackets in house, the vendor has notified Ross that the purchase price would drop from $15 per bracket to $14.50 per bracket if Ross will purchase the brackets in lots of 1,000. Lead times, however would increase to 3 days for this larger quantity.

(a) What is the total annual inventory cost plus purchase cost if Ross buys the brackets in lots of 1,000 at $14.50 each?
(b) If Ross does buy in lots of 1,000 brackets, what is the new ROP?
(c) Given the options of purchasing the brackets at $15 each, producing them in-house at $14.80, and taking advantage of the discount, what is your recommendation to Ross White?

Explanation / Answer

A.

Average Inventory = 1000/2 = 500

Average Inventory holding Cost = 500 * 0.1 * 14.5 = 725

Annual Ordering Cost = (2500 * 18.75)/ 1000 = 46.875$

Annual Purchase Cost = 2500 * 14.5 = 36250$

Therefore, Total annual inventory cost plus purchase cost if Ross buys the brackets in lots of 1,000 at $14.50 each

= 725$ + 46.875$ + 36250$ = 37021.88$

(B)

New ROP = Lead Time * Demand

= (3/365) * 2500 = 20.5479 units

C) Total inventory cost for Ross White in each of the 3 cases are:

                                                          = 187.5+187.5+2500*15= $37875

                                                         = 85.91 + 215.34 + 37000 = $37301.25

With the 3 options it is now clearly visible that for Ross Option (3), ie, Taking advantage of the discount @ $14.50 is the best option.

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