Question

1. `Sports Wear manufactures speciality clothing. The company requires 30,000 meters of fabric per year. Currently management orders 1,000 meters per order and the cost of each meter is $6. The ordering cost is $360 per order and carrying cost is $ 2.4 per year. Lead time is 3 weeks. The company operates 50 weeks per year.

Required:

1. Compute the total inventory costs under current plan?
2. Assuming no safety stock when TSP would make an order (reorder

           point)?

3. One supplier offers a discount of 1.5 percent per unit off the purchase price for kilogram for orders in lots of 6,000 kilograms. What impact would this have on inventory costs and should the order size be changed from EOQ order size?

Answer 1

a) Total Inventory cost under current plan (including purchase cost)= $ 192000

Working:

Annual Requirement = 30000 meters

Order Size = 1000 meters

No. of orders during the year = 30000/1000 = 30 orders

Cost of each meter = $ 6

Total Purchase Cost for the year = 30000*6 = $ 180000

Ordering Cost = $360 per order

Total Ordering cost for the year = 30*360 = $ 10800

Carrying Cost = $2.4 per year

Total carrying cost for the year = 1000/2*2.4 = $ 1200

Total Inventory Cost for the year = Purchase Cost+Ordering Cost+Carrying Cost

= 180000+10800+1200 = $ 192000

b)Reorder Level = 1800 meters

Working:

Here,maximum lead time and maximum consumption is not given.So we have assumed the given lead time and consumption is maximum for calculation of reorder level.

Consumption per week = Annual Requirement/Weeks during the year = 30000/50

=600 per week

Reorder Level=Maximum consumption*Maximum Lead time=600 meters*3 weeks

Reorder Level=1800 meters

c) We should accept discount offer as we can reduce our total inventory cost by $900.

Working:

Calculation of total inventory cost if EOQ approach is followed:

EOQ=(2*Annual Requirement*Ordering Cost/Carrying cost p.a.)^0.5

=(2*30000*360/2.4)^0.5

EOQ = 3000 meters

Ordering Cost=30000/3000*360= $3600

Carrying Cost=3000/2*2.4 = $3600

Purchase Cost=30000*6=$180000

Total Inventory Cost under EOQ = 180000+3600+3600 = $ 187200

Calculation of total inventory cost if discount offer is accepted:

Ordering Cost=30000/6000*360=$1800

Carrying Cost=6000/2*2.4=$7200

Purchase Cost=30000*[6*(1-0.015)] = $ 177300

Total inventory cost if discount offer is accepted = 177300+1800+7200 = $ 186300

We should accept discount offer as we can reduce our total inventory cost by $900(187200-186300).