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ACCT 2200 Study Guide - Carrying Cost, Purchase Order, Safety Stock

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sapphirebee626
30 Oct 2014
School
University of Iowa
Department
Accounting
Course
ACCT 2200
Professor
All

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Document Summary

The eoq approach assumes that some inventory must be held. The objective of the model is to balance the cost of ordering against the cost of holding inventory. In contrast, the jit philosophy is to reduce all inventories to the absolute minimum, eliminating them completely if possible. The jit viewpoint asserts that inventory holding costs tend to be higher than may be apparent because of the inefficiency and waste involved in storing inventory. This view, coupled with the jit goal of reducing ordering costs to very low amounts, results in the desirability of more frequent and smaller order quantities. In addition, under jit inventory management, order quantities typically will vary depending on requirements. In contrast, under the eoq model, the order quantity remains constant. The lead time is one month, so the safety stock is equal to the difference between average monthly usage and the maximum usage in a month. 65 tons (780/12), and the maximum usage is 80 tons.

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Related Questions

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.

Brothers Company asks you to look at the company’s inventory position. They think that inventories might be too high as result of the Manager’s tendency to order large quantities. Brothers has decided to examine the situation for one key product – fly rods that cost $320 each to purchase and prepare for sale. Annual sales for the product are 2,500 units (rods), and the annual carrying cost is 10 percent of inventory value. The company has been buying 500 rods per order and placing another order when the stock on hand falls to 100 rods. Each time SSP (SSP is a company that orders rods from Brothers) orders, it incurs a cost equal to $64. Sales are uniform throughout the year.

1. Brothers believes that the Economic Ordering Quantity (EOQ) model should be used to help determine the optimal inventory situation for this product. State the EOQ model.

2. What is the formula for calculating the total inventory cost?

3. What is the EOQ for the fly rods? What will the total inventory cost be for this product if SSP orders the EOQ amount?

4. What is SSP’s added cost if it orders 500 fly rods rather than the EOQ amount? What if it orders 250 rods each time?

5. Suppose it takes three days for SSP to receive its orders and package the rods before they are ready for sale. Assuming certainty in production time and usage, at what inventory level should SSP order more fly rods? (assume 360-day year, that SSP is open every day and that SSP orders the EOQ amount).

6. There is uncertainty in SSP’s usage rate as well as in order delays, so the company must carry a safety stock to avoid running out of the fly roads and facing a loss sale. If SSP carries a safety stock of 50 rods, what effect would this policy have on total inventory cost?

Buckshot Electronics is a chain of electronics superstores that is located throughout California. They have 15 locations concentrated primarily in heavily populated areas. They sell thousands of products made by hundreds of different manufacturers. Buckshot sells everything from phones, cameras, DVD players, and video game consoles to large items like televisions.

Sony is one of their larger suppliers. They offer products in nearly every category Buckshot offers to its customers. In fact, Sony sells multiple cell phone models through Buckshot. One such model is the Q9900.

One of Buckshot's San Francisco stores is forecasted to sell about 7800 units of the Q9900 in the coming year. This forecasted demand is about average in terms of Buckshot's 15 other California locations. Presently they order 900 units of the Q9900 every 6 weeks.

Each store fills weekly orders through its Sony Distributor for items like TV's, DVD Players, cameras, and of course, cell phones, in addition to many other items. Orders for cell phones must be made in increments of 100 units. The distributor takes only one order per week, but Buckshot is not obligated to order every item every week. That order is then shipped 2 days later to that individual Buckshot Electronics location by truck.

Buckshot's Central Procurement is looking to save money by investigating order sizes and subsequent order frequency. You are being asked to create a recommendation for order size and time between orders for the Q9900 based on the numbers for this San Francisco location. Answer the questions that follow in order to create a detailed report for your supervisor.

Below are some the key figures important in your analysis:

Q9900 Wholesale Price $ 325.00

Q9900 Retail Price $ 399.00

Annual Per Unit Holding Costs are estimated at 35% of the wholesale cost of the Q9900.

Costs associated with each order include: Order Placement Fees (Documentation, Network Support) $ 250.00 Delivery

(Fuel, Driver, Truck, etc.) $ 350.00

Packaging $ 150.00

Receiving (Inspection, Documentation, etc.) $ 150.00

Labor ( 5 hours @ $10.00/hr) Stocking, Misc. $ 50.00

Questions:

Using Present Lot Size (Q = 900)

According to the information supplied, what is the present annual inventory cost? (In other words, using their present lot size what is the annual inventory cost?) Also, separately identify, the annual cost of purchasing the inventory, the annual holding cost (AHC) and annual ordering cost (AOC).

7. What is the annual cost to purchase the items? (Q = 900) (Choose the closest answer)

8. What is the annual ordering cost, AOC? (Q = 900) (Choose the closest answer)

9. What is the annual holding cost, AHC? (Q = 900) (Choose the closest answer)

10. What is the total annual cost of inventory, TC? (Q = 900) (Choose the closest answer)

Using the Economic Order Quantity (Q=EOQ)

11. What is the EOQ? (Choose the closest answer)

12. Using the calculated EOQ, how often will orders be placed? All answers are in weeks. (Choose the closest answer)

According to the information supplied, what would be the annual inventory cost if they used the calculated EOQ? Also, separately identify the annual holding cost (AHC) and annual ordering cost (AOC).

13. Using the calculated EOQ, what is the annual holding cost (AHC)? (Choose the closest answer)

14. Using the calculated EOQ, what is the annual ordering cost (AOC)? (Choose the closest answer)

15. What is the total annual cost of inventory, TC? (Q = EOQ) (Choose the closest answer)

16. If they could order the EOQ instead of 900, how much would this one store stand to save annually?

17. Why is this not possible for this company to use the calculated EOQ as their order size?

PROPER ORDER SIZE The store must decide how often they want to order. • Remember, the weekly demand is 150 units. • If they order weekly, the store will require at minimum 200 units per week. • If they order every other week, the store will require at minimum 300 units to get to the next ordering period. (150 units per week, 2 weeks.)

18. If they order every 3 weeks, what will be the minimum required order size? Remember, you must abide by the Sony Distributor’s ordering rules.

19. Assume they sell exactly 150 units each week during the three-week period. Based on the appropriate answer to the previous question, how many extra units will they have left at the end of each three-week period?

20. Based on the ordering scenario where orders are placed every 3 weeks, over a 52-week year, how much extra inventory will this store have accumulated? (Take your answer to #19, divide by 3, and then multiply by 52)

21. If they instead order every 2 weeks what will be the minimum required order size? Remember, you must abide by the Sony Distributor’s ordering rules.

22. Assume they sell exactly 150 units per week. Based on the appropriate answer to the previous question, how many extra units will they have left at the end of the 2-week period?

23. Based on the weekly ordering scenario, over a 52-week year, how much extra inventory will this store have accumulated? (Take your answer to #22, divide by 2, and then multiply by 52)

24. Realistically, which of the following options is most attractive? An attractive option is one where the order size is close or equal to the EOQ, abides by the distributor’s ordering rules, and minimizes the amount of unnecessary inventory. (We will call this Q*)

According to the appropriate recommendation you provided in #24, what would be the Total Annual Inventory cost? Also, separately identify, the annual holding cost (AHC) and annual ordering cost (AOC).

25. Using the Q*, what is the annual holding cost (AHC)? (Choose the closest answer)

26. Using the Q*, what is the annual ordering cost (AOC)? (Choose the closest answer)

27. What is the total annual cost of inventory, TC? (Q = Q*) (Choose the closest answer)

28. The total annual savings for this one store using our recommendation (Q*) versus the present lot size of 900, would be:

TOTAL SAVINGS ALL STORES

29. Without store-by-store information it is difficult to say how much this would save the corporation. Nonetheless, using only the numbers for this store it can be said that if the numbers for the other 14 stores are similar there is a potential to save a total of about…Remember, there are 15 stores, total!

Thanks so much in advance! Much appreicated