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ADMS 3530 Lecture Notes - Lecture 13: Asset-Backed Commercial Paper, Transaction Cost, Market Liquidity

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mag0sea
13 Feb 2017
School
York University
Department
Administrative Studies
Course
ADMS 3530
Professor
King Lois

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Document Summary

3 main types of inventories: raw materials, work in progress and finished goods. Managers have to find a balance between two costs associated with all these inventories: Order costs: administrative and delivery charges associated with ordering inventory. As the firm increases its order size, the number of orders falls and therefore the order costs decline. Carrying costs: costs associated with holding and storing inventory. However, larger orders means an increased inventory size and higher carrying costs. Total costs = order costs + carrying costs. Economic order quantity (eoq) is the order size which minimizes total inventory costs: Just-in-time inventory management: a system of inventory management in which materials are delivered to the firm just when needed. Radio frequency identification (rfid): technology used to keep track of inventory movements and provide details of any item in the whole supply chain globally. Every item is attached to a microchip that transmits item-related information to the computer through radio frequency technology.

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Related Questions

Effect of management evaluation criteria on EOQ model. Computers4 U purchases one model of computer at a wholesale cost of $200 perunit and resells it to end consumers. The annual demand for thecompanyâ??s product is 500,000 units. Ordering costs are $800 perorder and carrying costs are $50 per computer, including $20 in theopportunity cost of holding inventory.
Required
1. Compute the optimal order quantity using the EOQ model.
2. Compute a) the number of orders per year and b) the annualrelevant total cost of ordering and carrying inventory.
3. Assume that when evaluating the manager, the company excludesthe opportunity cost of carrying inventory. If the manager makesthe EOQ decision excluding the opportunity cost of carryinginventory, the relevant carrying cost would be $30 not $50. Howwould this affect the EOQ amount and the actual annual relevantcost of ordering and carrying inventory?
4. What is the cost impact on the company of excluding theopportunity cost of carrying inventory when making EOQ decisions?Why do you think the company currently excludes the opportunitycosts of carrying inventory when evaluating the managerâ??sperformance? What could the company do to encourage the manager tomake decisions more congruent with the goal of reducing totalinventory costs?

Ottis, Inc., uses 640,000 plastic housing units each year in its production of paper shredders. The cost of placing an order is $30. The cost of holding one unit of inventory for one year is $15.00. Currently, Ottis places 160 orders of 4,000 plastic housing units per year. 1. Compute the annual ordering cost. 2. Compute the annual carrying cost. 3. Compute the cost of Ottis's current inventory policy. Is this the minimum cost? Why or why not? 4. Compute the economic order quantity. 5. Comoute the ordering, carrying, and total costs for the EOQ. 6. How much money does the EOQ policy save the compnay over the policy of purchasing 4000 plastic housing units per order?

Indicate whether each statement istrue (T) or false (F).

____ 1. Examples of carrying costs of inventory are obsolescence,opportunity cost of investment tied up in inventory, andinspection.

____ 2. The EOQ model does not include quantity discounts lost on inventorypurchases.

____ 3. EOQ minimizes the annual relevant total carrying costs ofinventory.

____ 4. An example of a cost pertaining to inventory that usually isirrelevant to the decision of how much to order is salaries ofstockroom workers.

____ 5. The reorder point decreases if the ordering costs per purchaseorder increase.

____ 6. JIT purchasing should be guided by the EOQ decision model.

____ 7. Adopting JIT purchasing is likely to result in fewer suppliers foreach item and more paperwork.

____ 8. JIT production operates as a push-through system.

____ 9. A key feature of backflush costing is that it tracks manufacturingcosts sequentially.

____ 10. When asingle Inventory Control account is used in backflush costing, thisaccount is restricted solely to direct materials, whether they arein storerooms, in process, or in finished goods.

____ 11. Althoughbackflush costing may not strictly adhere to generally acceptedaccounting principles, the accounting principle of materialityworks in favor of backflush costing when inventories are low.