Chapter 12 Case– Inventory Management

Background

Zhou Bicycle Company (ZBC), located in Seattle, is a wholesale distributor of bicycles and bicycle parts. Formed in 1981 by University of Washington Professor Yong-Pin Zhou, the firm’s primary retail outlets are located within a 400-mile radius of the distribution center. These retail outlets receive the order from ZBC within 2 days after notifying the distribution center, provided that the stock is available. However, if an order is not fulfilled by the company, no backorder is placed; the retailers arrange to get their shipment from other distributors, and ZBC loses that amount of business.

The company distributes a wide variety of bicycles. The most popular model, and the major source of revenue to the company, is the AirWing. ZBC receives all the models from a single manufacturer in China, and shipment takes as long as 4 weeks from the time an order is placed. With the cost of communication, paperwork, and customs clearance included, ZBC estimates that each time an order is placed, it incurs a cost of $65. The purchase price paid by ZBC, per bicycle, is roughly 60% of the suggested retail price for all the styles available, and the inventory carrying cost is 1% per month (12% per year) of the purchase price paid by ZBC. The retail price (paid by the customers) for the AirWing is $170 per bicycle.

ZBC is interested in making an inventory plan for 2016. The firm wants to maintain a 95% service level with its customers to minimize the losses on the lost orders. The data collected for the past 2 years are summarized in the following table. A forecast for AirWing model sales in 2016 has been developed and will be used to make an inventory plan for ZBC.

Solution Requirements

Utilize Microsoft Excel to complete the following steps. Submit the assignment in Excel for credit. No credit will be given for work submitted in another file format. Pay attention to formatting and clearly label all steps:

Develop an annual inventory plan for to help ZBC by completing the following steps.

1. Calculate the economic order quantity for ZBC’s estimated demand.

Hint: Have to convert the inventory carrying cost % to annual $ amount.

2. Determine how many times orders should be placed throughout the year. How often should orders be placed?

Hint: assume 300 working days per year.

3. Calculate the reorder point, include safety stock.

4. Determine the total costs of inventory, including product costs.

5. Write a short paragraph or memo outlining the process that ZBC should follow with their inventory plan.

6. Bonus Question: Trace the inventory balance over the course of the year. Assume a starting inventory balance of 35 bicycles. Also assume that retail orders are called into ZBC the first business day of every month and the first order to ZBC suppliers is on Jan 4, 2016.
What conclusions or recommendations do you draw from tracing the inventory?

Hint: Take into consideration orders to suppliers and supplier lead time, orders from retailers and lead time in shipments to retailers, as well as the estimated time between orders to suppliers. Consider creating a table similar to the one below. Make sure to fill in dates, order quantities, and calculate the inventory balance.

The values listed below are waiting times​ (in minutes) of customers at two different banks. At Bank​ A, customers enter a single waiting line that feeds three teller windows. At Bank​ B, customers may enter any one of three different lines that have formed at three teller windows. Answer the following questions.

a) Using Chi-Square critical values construct a 90​% confidence interval for the population standard deviation σ at Bank A.

b) Construct a 99​% confidence interval for the population standard deviation σ at Bank A.

c) Construct a 99​% confidence interval for the population standard deviation σ at Bank B.

Interpret the results found in the previous parts. Do the confidence intervals suggest a difference in the variation among waiting​ times? Does the​ single-line system or the​ multiple-line system seem to be a better​ arrangement?

A.

The variation appears to be significantly lower with a single line system. The​ single-line system appears to be better.

B.

The variation appears to be significantly lower with a single line system. The​ multiple-line system appears to be better.

C.

The variation appears to be significantly lower with a​ multiple-line system. The​ single-line system appears to be better.

D.

The variation appears to be significantly lower with a​ multiple-line system. The​ multiple-line system appears to be better.

Select the experiments that use a randomized comparative design.

Environmental scientists are concerned with the effects of nitrogen on the drinking water supply. Hundreds of farmers have volunteered to participate in the study in exchange for free fertilizer. The scientists assign the low-nitrogen blend to 25 randomly chosen farms near rivers, creeks, and tributaries and assign the normal blend to 25 randomly chosen farms not near such bodies of water. The scientists then compare mean biomass production in grams per square meter during the growing season.

Participants in a study to determine the effects of a new cholesterol drug are divided into groups based on gender. All males receive the new drug, and all females receive a currently approved drug.

A gas company offers three plans to customers. The company randomly chooses 200 customers who have signed up for each of the three plans. It then compares their gas bills over six months to determine which plan saves customers the most money.

To test a new epidermal treatment on fish in polluted pond water, 60 fish with epidermal abrasions from the same pond are randomly placed into three groups. One group receives the new treatment, another group receives the existing treatment, and the third group receives no treatment.

Students have volunteered to participate in a study of the effects of caffeine on memory. A computer program assigns each student at random to drink either a caffeinated or a decaffeinated beverage. The students are then given a list of 20 different objects to study for one minute and asked to write down as many of the new objects as they can remember.

Big State Computers has premises on the main street of a large regional city. The business is owned by Max and Betty Waldup, who purchased it three years ago. Betty has an extensive background in IT and has a talent for diagnosing and solving problems with computers that are brought in for repair. Max also has an IT background and oversees the sales and administration staff. They employ three people: a computer technician who assists Betty, a part-time salesperson, and a part-time bookkeeper. Sally, the bookkeeper, enters transactions into a simple computerized accounting system. Sally is also responsible for issuing invoices and monthly statements to customers who have service contracts with the business. These customers are generally other businesses who ask Betty to visit their premises for routine and emergency repairs and who purchase software and hardware from the business. Max and Betty have worked diligently over the last three years, but they are having cash flow problems. Their bank manager has requested a meeting to discuss the business's poor cash balances. The bank manager asks Max and Betty to prepare for the meeting by analyzing their accounts receivable and customer receipts. Max and Betty review the accounts receivable ledger and find that it is not up to date. They also discover that customer statements have not been printed or mailed to customers for four months. They are unable to identify from the cash receipts journal which clients have paid their accounts.

Required

1) Discuss the attitude and control consciousness of Big State Computers's management.

2) Which duties should be segregated in this business? Recommend an appropriate allocation of duties for the personnel at Big State Computers.

Greg Norman is the auditor in charge of the Rogers Pharmaceutical Company audit. In assessing the internal controls for the company, Greg finds that the company bills customers and receives payments at three offices in three separate states using three different and incompatible software systems for tracking payments. Rogers’s terms of sale varies with the customer and varies from 30 days to 90 days. Open invoices are aged based on when they were booked to the receivables, but cash, chargebacks, or rebates are aged based on when they were applied to the account. Thus, a credit could be posted to the customer’s account when it was received, but the related invoice(s) remains open as a receivable and continues to age. Chargebacks are significant and linked to batch of product rather than invoice. Most similar companies have credit limits or credit checks but Rogers’s does not because all wholesalers are board certified M.D.’s, like the company’s founder.

Rogers’s total accounts receivable was $25,276,025.

Rogers’s total accounts receivable past due over 61 days was $17,434,500.

Rogers’s past top-five wholesalers had accounts receivable of $13,457,516.

Rogers’s top-five wholesale customers had $5,428,850 past due over 61 days.

Rogers’s allowance for doubtful accounts of $266,000 did not include any estimates for the top-five wholesale customers because it was management’s belief at the time that the top-five wholesalers did not present a collection risk.

Required:

Based on these control issues and findings, explain some of the most likely sources of misstatement that exist.

You work at Happy Joe's family restaurant and want to see if customer meal satisfaction and gender are related to one another. You take a sample of customers and ask them if they were satisfied with their meal and note their gender. To test at the 0.1 level to determine if Satisfaction and Gender are dependent, calculate the chi-square test statistic and p-value.

26 29

27 8

17 13

Numbers in the chart that wouldn't copy over ^

Question 3 options:

Q 2?Rafique Inc. makes product A and sells at selling price of SAR 45 per unit. Badr Inc. wants to buy 5,000 units at SAR 27 per unit. Rafique Inc. has a normal capacity of 101,000 units and projected sales to regular customers this year is 92,000 units. Per unit costs traceable to the product (based on normal capacity of 92,000 units) are listed below?

Direct Materials??8.1

Direct Labour?`??6.0

Variable Mfg. Overhead?6.2

Fixed mfg. overhead??4.8

Fixed administrative costs?0.8

Fixed Selling Costs??0.4

Does the quantitative analysis suggest that the company should accept the special order?

k   Q 3 Discuss the qualitative factors in Keep or Drop Decision in details.

Question 1:

Suppose that your group is the executive sales team for Starbucks. The CEO has just proposed lowering the price of regular coffee and increasing the price of specialty coffee drinks. The belief is that our customers are sensitive to a price change of regular coffee but much less sensitive to a change in the price of specialty coffee. As such, your team is tasked with providing an analysis on this proposal. In order to provide your analysis, you need to find out if the CEO’s theory about customer behavior, and their sensitivity to price changes for regular and specialty coffee, is correct. In order to find out how sensitive customers are to a price change, you will need to calculate the price elasticity of demand, describe what that means, and evaluate the impact on revenues.

For this activity, use the standard percent change formula (also known as the point method).

You have been given the following data on prices and changes in quantity demanded.

Regular Coffee:

Current Price per cup: $2.00 and quantity sold per month is 1 million

Proposed Price per cup: $1.80 and estimated quantity sold per month is 1.5 million

Specialty Coffee:

Current Price per cup: $4.00 and quantity sold per month is 50 million

Proposed Price per cup: $4.40 and estimated quantity sold per month is 47 million

Part 1: Find the elasticity of demand for regular and specialty coffee.

Part 2: Find the total change in revenue for regular and specialty coffee.

Part 3: Use a demand curve graph to explain the change in revenue. You only need to show the demand curve on your graph.

You may upload a picture/file of your graph or use the creately template.

Question 2:

Suppose that your group is the executive sales team for McDonalds. The CEO has given your team a proposal; To analyze the impact of raising the price of the Big Mac by 10% and raising the price of regular fries by 10%.

In order to provide your analysis, you need to find out how sensitive customers will be to a price change of Big Macs and fries. In order to find out how sensitive customers are to a price change, you will need to calculate the price elasticity of demand, describe what that means, and evaluate the impact on revenues.

For this activity, use the standard percent change formula (also known as the point method).

You have been given the following data on prices and changes in quantity demanded.

  Big Mac:

Current Big Mac Price: $2

Current Big Mac monthly sales: 1 million

Estimated monthly Big Mac sales at the new price: 980,000

Regular Fries:

Current regular fry Price: $1.50

Current regular fry monthly sales: 2 million

Estimated regular fry monthly sales at the new price: 1.4 million

Part 1: Find the elasticity of demand for the Big Mac and fries.

Part 2: Find the total change in revenue for the Big Mac and fries.

Part 3: Use a demand curve graph to explain the change in revenue. You only need to show the demand curve on your graph.

You may upload a picture/file of your graph or use the creately template.

Gallatin Carpet Cleaning is a small, family-owned business operating out of Bozeman, Montana. For its services, the company has always charged a flat fee per hundred square feet of carpet cleaned. The current fee is $22.85 per hundred square feet. However, there is some question about whether the company is actually making any money on jobs for some customers—particularly those located on remote ranches that require considerable travel time. The owner’s daughter, home for the summer from college, has suggested investigating this question using activity-based costing. After some discussion, she designed a simple system consisting of four activity cost pools. The activity cost pools and their activity measures appear below:

The total cost of operating the company for the year is $353,000 which includes the following costs:

Resource consumption is distributed across the activities as follows:

Job support consists of receiving calls from potential customers at the home office, scheduling jobs, billing, resolving issues, and so on.

Required:

1. Prepare the first-stage allocation of costs to the activity cost pools.

2. Compute the activity rates for the activity cost pools.

3. The company recently completed a 200 square foot carpet-cleaning job at the Flying N Ranch—a 53-mile round-trip journey from the company’s offices in Bozeman. Compute the cost of this job using the activity-based costing system.

4. The revenue from the Flying N Ranch was $45.70 (200 square feet @ $22.85 per hundred square feet). Calculate the customer margin earned on this job.