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 1.050 each. 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: Assume that half of lot size is in inventory on average (1.050/2 = 525 units). Two qualified suppliers have submitted the following quotations: Your assistant has obtained the following freight rates from your carrier: Petron-mile = 2,000 lbs. per mile. Calculate the total cost for each supplier. Which supplier would you select? Supplier 2 Supplier 1 If 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.)

Explanation / Answer

As per the statements given : Ordering cost per order is , say A = $165, Annual Demand, say D = 12,600 units and Inventory carrying cost is 20% of the average value of inventory per year. It is also mentioned that the average inventory is 525 units. Let us denote the holding cost as H.

In order to evaluate the alternatives or options available , we are required to calculate the Total annual costs for each option. This includes the purchase costs, tooling costs as well as transport costs in addition to order processing and inventory carrying costs.

To begin with , let us have a look at the comparison, if the quantity per order is 1050 units as per the question

Based on above calculations Supplier 2 is preferred.

b-1. If lot size is upto ship trucklooad quantities, then lot size is 2100 units (multiple of 1050) having weight 52,500 pounds as compared to truckload of 53,000 pound. Otherwise, the exact size should be 2120 units per order. In case of order size of 2100 units, the average inventory level will be 1050 units. The costs calculations are as follows:

Now Supplier 1 is preferred, in the above table truckload rates are charged for actual weight of 52,500.

Order size-1050 Supplier1 Supplier2 Unit price $ 534 532 Annual Purchase Costs $ 6728400 6703200 Number of orders per year 12 12 Fixed Tooling Costs 27000 24800 Average Inventory value 280350 279300 Annual Ordering Costs 1980 1980 Annual Holding Costs 56070 55860 Pounds per order 26250 26250 Transportation costs/order 2047.5 1575 Annual Transportation costs 24570 18900 Total costs 6838020 6804740

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