Question

Fun International is an electronic toy manufacturing company, based in Toronto, Canada. Fun International manufactures a variety of electronic toys that “speak” to their patrons – children. Over the last 15 years, people at Fun International have mastered the art of creating and packaging toys.

A lot of electronics and circuitry goes into the making of a “speaking electronic” toy. One key component of any electronic toy built by Fun International is a circuit board. In the past, Fun International have sourced their circuit boards from MS Electronics, also based in Toronto. Fun International incurs a cost of $300 each time they place an order. MS Electronics has been very reliable and have supplied the required number of circuit boards to Fun International. Circuit boards supplied are stored in Fun International’ s stock control room. The inventory manager at Fun International uses an annual inventory carrying cost of $10 per electronic board.

Dan is a Product Manager at Fun International. He has been with Fun International for the last 15 years and is one of the architects of Fun International. One day, Dan receives a meeting request from Tim, the Chief Design Engineer at MS Electronics.

Hi Dan

Hope you are doing good. Sarah is our new Head of Sales at MS Electronics. You being our key customer, I wanted Sarah to meet up with you. Are you OK to have a 30 min meeting at 3:00 pm with us on Wednesday, 15th April? We will come over to your office.

Once you confirm I will schedule it in your calendar.

Regard

Tom

On Wednesday, at 3:00 pm, Tom and Robert arrive at Dan’ s office.

“Hi Dan, good to meet you again” greets Tom. Pointing toward his colleague, Tom continues” This is Sarah. She is the new Head of Sales at MS Electronics.”

“Good to meet you Sarah, and congratulations. So, how can I help you guys today?” asks Dan.

“Our CEO kick-started a customer relationship program earlier this year, to develop a deeper understanding of our customer requirements. Sarah and I are here today to find out more about your electronics & circuitry requirements for your current and future line of products.”

“We would also appreciate any feedback you may have on our components that have been part of your products for the last 15 years.”

“Sure, Tom, and Sarah. I can speak for Fun International. Let me start by saying we are pleased with the quality and reliability of the electronic boards we buy from you guys. There are virtually no customer complaints, and it seems our partnership has been mutually beneficial to both our companies. We currently source 2500 circuit boards from you each year, and I do not see that number changing for the next 2 years,” says Dan.

“The next year we are coming up with a new line of product, but from a requirements point of view, we will continue to use the same circuit board in the new line. There are no anticipated changes to the design,” says Dan.

“My procurement manager tells me that the rates of electronics goods are falling the world over, and despite being a business partner for 15 years you guys have never lowered your rates while we continue to procure components from MS Electronics. Still we are paying $30 per electronic board regardless the quantity.” Dan adds.

“I can take that up with our CEO and see what best we can work for Fun International. I will send you an email in any case.,” says Sarah.

The next morning Dan has this email from Sarah in his inbox:

Hi Dan,

Thanks for your hospitality. We had an excellent meeting yesterday and we are glad that MS Electronics have been meeting your requirements. We will strive to continue meeting your expectations. During our meeting, you did express displeasure on the rates we have been offering on our circuit boards. On my return to the office I had a meeting with our CEO in which **decided we will offer Fun International an all-units discount as per schedule below:

Order quantity range Effective purchase price per unit

Range	Price
0–599 circuit boards	$30.00
600–1499 circuit boards	$29.00
More than 1500 circuit boards	$28.00

I am genuinely hoping you will appreciate the new rates, and am sure Fun International and MS Electronics will continue collaborating in the coming years.

Regards

Sarah

Case Study Questions:

1. Calculate the current EOQ and Total Inventory Cost for Fun International.
2. Calculate the feasible and optimal order size under the new schedule offered MS Electronics.
3. Why do you think MS electronics decided to revise their pricing schedule? Explain
4. How the new price schedule will affect Fun International? Explain
5. Do you think Fun International will continue to purchase from MS Electronics? Explain

Answer 1