objectiv "that the students beable to: thi! a ain the concept of Sirs aa 3, URC ni entory management: iiffering views, common techni i FA 2 pie caopt of economic order quantity ‘hniques, and international concems, eptof Justin Time (ITT) inventory system , Be 3. Fientanatecone sutroauction ‘ it i titutes the most signific: ‘The investment in inventories const en ; of the undertakings. Thus, itis very essential to have proper control es eee urpose of inventory management isto ensure availabilty of materials in sufficient manttyasand when roquied and alsoto minimize investment in inventories Tt is necessary for every management to give proper attention to inventory mani ony ry me sng nag ad oy pra gement. Anefcient system of inventory management will determine the following: Y What topurchase y How much to purchase Y From where to purchase Y Where tostore ‘There are conflicting interests and viewpoints of different division heads over the issue of scenario is for a manufacturing setup. al disposition toward inventory levelsis to keep them low, inventory. Below ; Thefinancial manager's gener toensure that the: firm's money is not being unwisely ‘invested in excess resources. The marketing manager, On the other hand, would like to have large inventories of the fiem’s finished products. Te production manager's major responsibility isto implement the production plan so that ane ernae the desired amount of finished goods of acceptable quality available on time ata low cost. « Thepurchasing manager isconcerned solely with the raw materials inventories. Inventory Management Itrefers to the development and administration of inventory policies, systems, and procedures necessary to efficiently and satisfactorily meet inventory requirements at the minimum cost possible. It requires the coordination of both purchasing and financing functions to’ effectively manage inventory. Normally, inventory utilization could be: ‘evaluated by the turnover formula. Turnover formula canalso be used as a measure of efficiency in purchasing, stock managementand selling activities.ic decision in a manufacturing, retail and even in In most case thebasic en hand. As the inventory levels are. estabige Se is how many inventories must ov important factor in a budgeting process $y, Objectives of Inventory Management ; ies while maintaining customer service levels and quay, To reduce inventories while maint growth, Tee ne gealty. needed cash to finance both internal and external gr us, it involvag "tng, between ordering costs, carrying or holding costs and shortage costs, dates y 1. 2. To establish production and inventory control. The following must be noted in inventory management: be set up; (such as stock card 4. Control - Proper control system must i sand of inventory physical movements, though with the advancone’ oF oy inventory controlsare through computers.) lag ‘ 5. Information - Information on inventory level must be properly comin a avoid stock out. tg, © Inventory value- Stored items have value and this value must be reflecteq nae statements about inventory. For inventory management purposes this ant inc x Cost of carrying inventories: * Desired rate of retum on inventory investment (foregone Interest on workin tied up in inventory) * _ Risk of obsolescence, spoilage, theft and deterioration J Storage spacecosts (warehouse, depreciation or rental, security) "Property taxes "Insurance om ii, Cost ofordering or set up costs: * Preparing purchase or production orders 1 Time spent in finding suppliers and expediting orders 2 Cletical costs of preparing purchase order * Receiving (unloading, unpacking, inspecting) 1 Transportation costs 2 Receiving costs * Processing all related documents * Mailing and stationery costs * Other costs like telephoning and typing orders itt, Shortage costs: * Disrupted production when raw materials are unavailable 3 Idle workers 4 Extra machine setupne RRR res * Lost sales resulting in dissatisfied c a 8 ‘ustomers = Loss of quantity discounts on purchases Economic Order Quantity (EOQ) The basic inventory problem. facing a firm is one of mini imizii it i Insolving this problem, the firm also has to avoid the possiblity aS ree Sase in customer Joss and dissatisfaction. Minimizing total inventory cost can be dealt with the use of the OQ, which assumes that the relevant costs of inventory can be divided into order costs and carrying costs, Order costs are the fixed clerical costs of placing and receiving an inventory order. Carrying costs are the variable costs per unit of holding an item in inventory for a specific period. BOQ is the order size or the appropriate number of units that must be ordered at the least cost, EOQ is the optimal number of units to be ordered to maintain the minimum cost. Basic Assumptions in Using EOQ 1. Supply of goods is stable 2. Demand occurs ata constant rate throughout the year 3. Lead time on the receipt of the orders is constant 4, Theentire quantity ordered is received at one time 5. The unit costs of the items ordered are constant; thus, there canbe no quantity discounts 6, Thereareno limitations on the size of the inventory. Formula: EOQ = Where: Demand annually for the product or use for raw materials Order cost per order placed or set up cost for production © = Carrying cost annually of one unit in inventory Total Carrying cost is equal to the percentage cost of carrying inventory (C) times the price of inventory per unit (P) times the average number of unit held (Q) Tcc = Cx PxQ Average inventory = Order size divided by 2 Total Ordering cost is equal to the fixed cost of placing an order (C) times the number of orders placed per year (N) is computed by: TOC Toc CxN Number of orders x cost per order wu Number of orders = Total Demand or Requirements per year divided by order size.SW Illustration: jalclothin its doll production with cq. material clot caren A towile manufacturer usesra0 MAE ards per Year and ord Py, per-yard per year. Annual consump! erin, ey, order. , iy. , 1. Determine the economia atifit wil order at BOO level 2. Determine the ann Solutions: e DOC . 1. 50Q vino TOMY =1g9 units 2. Totalcosts = a2) * 6/20) (189/2) (P14) + (25,000/189) (P10) = P1323.00 + P132275 = P2,645.75 Another use of EOQ is tohelp the management decide how go © Bee ata time ang " to order. This is known as re-order point. This decision depen on the lead time. Thou, ” example, usage is constant at an average. But more often it fluctuates, means it could Tow higher than the average sale or consumption. In this uncertainty, management may wish jr mae safety stock, though maintaining safety stock increases carrying costs it reduces the Potential cant shortage or stock-out. Stock- out entails costs as well. . Stock out costs include lost sales and lost customer goodwill. These costs are Rormally aig by carrying safety stocks. Thus, stock out costs would include the carrying costs of safety sa computed in the same manner of as we computed the total carrying costs (TCC). Reorder point represents the level ofinventory where the order must be placed for the quantiy size as predetermined in the EOQ. Re-order point = (daily demand x lead time) plus safety stock. Tend time is the time interval between placing an order and receiving delivery. Safety stock is inventory carried over and above the quantity determined by the EOQ formult ‘meet unanticipated demand or delays, Safety stock = (maximum lead time - normal lead time) x daily demand, or Safety stock = (maximum daily demand minusnormal daily demand) x _ lead time Note: If th it ime is . a it ° eee “ine isknown, reorder point must be based on maximum lead time rater7 Illustration: Assume the following situation: A company produces parts for toy trains and has the following quanti Orders must be placed for parts to produce a group of 150 Ra aes Annual unit usage is 300,000 (assume a 50-week year). The carrying cost is 17% of the purchase price, The purchase price is P1.20 per unit. The ordering cost is P30 per order. The desired safety stock is 800 units. The delivery time is one week or 6 days. Given the above information: a. Determine the optimal EOQ level. b, Determine the number of orders placed annually ¢. Determine the inventory reorder point d. Determine the average inventory level Solutions: a. EOQ = 2D0/C = ,/[2300,000)G0)]/.204) = 9,393 units b. Numberoforders per year = (300,000/9,393) = 32orders per year c. Inventory reorder point daily demand + safety stock [(800,000 /300days) (6 days)] + 800 6,000 + 800 = 6,800 units or Inventory order point delivery time stock + safety stock [€1/50) x 300,000] + 800 6,000 + 800 = 6800units d. Average inventory (BOQ/2) + safety time stock (9393/2 + 800 4,697 + 800 = 5,497 units In some cases, safety stock level in units must consider the probability of stock out. This has to offset the amount of carrying and ordering costs with the cost of stock out. The following information must be known: Safety Stock (SS) = _ the safety stock level that gives the lowest cost. The cost is equal to thesum of stock-out costs and carrying and ordering costs. Probability (P) = _refers to the estimated likelihood of stocking out will occur. Cost per stock-out (C) = theestimated opportunity cost of stock out. Number of orders (N) = thenumber of times to order Carrying cost (CC) = Carrying cost per unita[b[ec] dle £ g | h i (axbxexdxe) (exp ss[P le lo lm Total (SS) | (CO) Totar 20 | 50 | (50)| (P80)| 6) P200 (20) | (4) | Pa 30_| 40 | (40) | (P80) | (6) 160 (30) | (4) | 120 40 [25 | (.25)| (P80) | 6) 100 (40) | (4) | 160 50_| 10 | (10) | (P80) | 6) 40 (60) | (P4) | 200 60 {05 | (.05)| (P80) | 6) 20 (60) | (4) [240 Weaknesses of EOQ Model ; Illustration: ing information: t of safety stock that it sh, ‘Assume the following to know the: amount f an it shou, XZ Corp. wishes ellowing information related to theip ta . result in thelowest ven : Stock out cost pet ees stock ‘ i st per Saat cr purchase orders peryest ‘The following options were tabulated on thenext page: Probability of Running out of safety stock Units of safety stock sec 0 40% ‘0 25% 50 10% “ o Thefollowing table will show that at 60 safety stock level willesultin the Lowey co Assumes that demand is constant and uniformly occurred through out the year. If demani unstable, say it varies from day to day, the model should be modified to include safety soxk Assumes a constant unit Price. Adjustments must also be made if quantity discounts are bei} offered, Assumes constant carrying costs. The unit carrying cost will vary as the level of invest] changes. The higher the average inventory level, the higher the carrying cost. Assumes constant: ordering costs, if not, EOQ cannot be used. Sa Assumes instantaneous delivery, thats, expected lead re isachieved, and if not, saf#s! will have to be added into the model, Orders are assumed to be in sal dependent. It meat i ymbine orders el er means that the firm does not co!tein-Time (JIT) System Just A system of inventory control in which a manufacturer coordinate with suppliers so that raw materials or component parts will be received just in time they are needed in the production process. just the same, completion of products will be made just in time they are to be delivered to the customers. objective of IT The primary concern of the JIT system is to reduce carrying costs particularly cost of investment in inventory on hand itself, and other related control costs. To some extent JIT system reduces the need {for the purchases to carry inventories by passing the problem back to its suppliers; however, with a coordinated production schedule, the supplier may also benefit: 1. By having able to schedule production runs better, and 2. By having tocarry lower finished goods inventory safety stock. If any of the above reasons, coordination between suppliers and users lessen total inventory jrements and reduces total production costs. Accounting wise, JIT simplifies its recording procedures which has been discussed in detail in cost accounting, The concem of financial managers is for them to control the determinants of costs and how they can be minimized. Computerized Systems for Resource Control A materials requirement planning (MRP) system is an inventory management technique that applies EOQ concepts and a computer to compare production needs to available inventory balances and determine when orders should be placed for various items on a product's bill of materials. ‘Manufacturing resource planning II (MRP Il) is a sophisticated computerized system that integrates data from numerous areas such as finance, accounting, marketing, engineering, and manufacturing and generates production plans as well asnumerous financial and management reports. Enterprise resource planning (ERP) is a computerized system that electronically integrates external information about the firm's suppliers and customers with the firm’s departmental data so that information on all available resources—human and material—can be instantly obtained in a fashion that eliminates production delays and controls costs.ite “True” ifthe statements true, Oph, MENTS Write ise, 1, TRUEOR FALSE STATE! * isposition toward inventory \CUE 1. The financial manager's general po ey invested ioeeee 3 ce, gsurettt heis mney nat beng Model is an inventory my. SUtceg” th ul 2. The Economic Order Geant] (202) ry anagem, ining an item's optimal order siz , " ulpiabsaheubaahes einer unit of holding an item ip « t F aise 3. Oniering costs are the variable costs per — in Ita iN . is the point at which to reorder inventory, expressed ag cae, ean ERENCE NT Soma pe io i conversion cycle ; \ inv turnover ratio increases, the inventory conv Ycle in, a a eee a the maximum amounts of inventories that “wt a schedules or the satsfactonofcusomer expectations. ks = False 7. The reorder point is an inventory eee syst em wt Compares Prod. ty available inventory balances and determines when orders should be Placed f orton 's bill of materials. ; ; , tcw 8. See istused as a buffer against unexpected increases in demang, —_ MC ied time, and unavailability of stock from suppliers. any False 9. Enterprise resource planning (ERP) is an inventory management technique - i i als arrive at exactly the 4; that mi. inventory investment by having materials arrit ly the time ee production. ; —_ TR 10. A materials requirement planning (MRP) system is an inventory mana; oe & applies EOQ concepts and a computer to compare production, needs to even balances and determine when orders should be placed for various items on a prog materials, : ; sg) Fale 11. A purchasing manager would purchase higher inventories when prices are low ang inventories when prices are high irrespective of inventory requirement, love False 12 A marketing manager would like to have smaller inventories of finished Products ip Production of goods as per customer specification, rea TWV€1S. A financial manager would keep inventory levels low to ensure that the firm's Eee unwisely invested in excess resources Fale 14.4 manufacturing manager would keep raw materials inventories low to ensu Te US fi Fals¢ __ materials in production process, 15, Because its obj safety stock. . ; istoy tthe s % jective is to maximize inventory investment, a JIT system uses no (or very arecalled purchasing costs, , Fal 18. Firms should hold the maximum amounts of inventories that will ensure produ schedules or the satisfaction of customer expectations, Fals 19. The reg nomic-order-quantity decision model takes into account occurrence of stockouts Fal 20. Asthe inventory turnover ratio increases, the inventory conversion cycle increases. “Tr 21. In EOQ model, the average inventory is defined as the order. quantity divided by 2. arty ‘((f 22. In the BOQ model, the total Costs minimized at the point where the order costs and © costs are equal,_ ‘chapiorS inventory Management uw | Flg23. The reorder point is an inventory management system that compares production needs to available inventory balances and determines when orders should be placed for various items | ona firm's bill of materials, {y44, Safety stock is used as a buffer against unexpected increases in demand, uncertainty about Jead time, and unavailability of stock from suppliers. falk25. The objective for managing inventory is to improve the average collection period without affecting the sales JI. MULTIPLE CHOICE QUESTIONS Encircle the letter that corresponds to the best answer 1, Assuming demand is deterministic, what is the essence of the economic order quantity model for inventory? a. To minimize order costs or carrying costs and maximize the rate of inventory turnover. b. Theminimize order costs or carrying costs, whichever is higher. c. To order sufficient quantity to economically meet the next period's demand, To minimize the total order costs and carrying costs. C 2. Which of the following is a relevant factor in the determination of an economic order quantity? a. Physical plant insurance costs. b, Warehouse supervisory salaries. G@) Variable costs of processing a purchase order. d. Physical plant depreciation charges. 3, The estimates necessary to compute the economic order quantity are (G@ Annual usage in units, cost per order, and annual cost of carrying one unit in stock. . Annual usage in units, cost per unit of inventory, and annual cost of carrying one unit in stock. c. Annual cost of placing orders, and annual cost of carrying one unit in stock. d. Cost of placing orders and carrying cost. 4, What effect, if any, will a last-in, first-out inventory method have on economic order quantity )? Noeffect . LIFO will reduce the order quantity in times of rising prices. c. LIFOwill increase the order quantity in times of rising prices. d. FIFO will increase the order quantity in times of rising prices. 5. A company buys a certain part for its manufacturing process. In order to determine the optimum size of a normal purchase order, the formula for the economic order quantity (EOQ) is used. In addition to the annual demand, what other information is necessary to complete the mula? Cost of placing an order, and annual cost of carrying a unit in stock. 'b. Cost of the part, and annual cost of carrying a unit in stock. c. Cost of placing an order. d. Cost of the part.; management ignoring safety stocks, which of the fon, 6. For inventory ee cint? on computation of the reor' ler po! a. Theeconomicorderquantity: lied by the anticipated d . wultiplied by Ei leman, . The economic order quant Tend. dun ng ticipated demand duu . - the a. te a of the anticipated demand during the lead-time, Me 4 7. Wich ofthe fllowingcould be determined by using the economic order, aan, a.) Optimum size of a production tun iy . % Safety-stock . c. Stock-out cost d, Order point : i ic order quantity formula ». 8. The order size determined by the economic or nih ae cost which is comprised of ordering costs and Minimizes a a. Safety-stock cost % b. Stock-out cost c. Set-up cost QO Carrying cost 9. For its economic order quantity (EOQ) model, a company hasa cost of wa Placin, P10, and an annual cost of carrying one unit in stock equal to P2. If the cog: -o a a ‘Cost of io increases by 20% and the annual cost of carrying one unit in stock increase SBE other considerations remain constant, the EOQ will By andy a. Remain unchanged Increase Decrease . Either increase or decrease depending on the reorder point. 10. Uncertainty regarding product demand and delivery time for replenishing stock affects th of a safety tockinventory In this regard, which of the following statements recone? i The more certain is the delivery time for replenishing stock, the more safety se needed. / Theless certain is the delivery time for replenishing stock, the more safety stock is neekd i. The more certain is product demand, the more: ‘safety stock is needed. iv. Theless certain is product demand, the more safety stock is needed. iand iif iandiv iiand iii iiandiv Ti. With regard to the optimal order quantity (Q’), which ofthe following statements arecom! i. _Ascarrying cost per unit increases, Q" increases, fi, As total demand over the planning period increases, Q” increases. iii, As ordering cost per unit increases, Q* increases,a. ionly . iionly d. i, ii, andiii 12, The_____isthe time period that elapses from the point when a firm uses the raw materials inmanufacturinga finished good to the point when the finished goodis sold. a. cash turnover b. cash conversion cycle © average age of inventory ( average collection period 13, A firm may have a negative cash conversion cycleifitcarries__. a. high inventory and sells its products for cash b. high inventory and sells its products on credit Q@ verylittle inventory and selisits products for cash d, very little inventory and sells its products on credit 14. Jae Co. uses the economic order quantity (EOQ) model for inventory management. A decrease in which one of the following variables would increase the EOQ? a, Annualsales. b. Cost per order. ¢. Safety stock level. (4. Carrying costs. 15. The level of safety stock in inventory management depends on alll of the following except the (a) Costto reorder stock. Bb. Cost of running out of inventory. c. Level of uncertainty of the sales forecast. d._ Level of customer dissatisfaction for back orders. 16, The objective for managing inventory is to 5 a. improve the average collection period without affecting the sales turn over inventory as quickly as possible without losing sales from stockouts make payment for the inventory as slowly as possible without losing suppliers reduce the time taken to process inventory into finished goods and increase sales ao 17. ABC Company has correctly computed its economic order quantity at 1,000 units; however, management feels it would rather order in quantities of 1,500 units. How should ABC’s total annual purchase order cost and total annual carrying cost for an order quantity of 1,500 units compare to the respective amounts for an order quantity of 1,000 units? a. Lower purchase order cost and lower carrying cost (@ Lower purchase order cost and higher carrying cost c. Higher purchase order cost and higher carrying cost 4. Higher purchase order cost and lower carrying costsits economic order quanti ih quantities of 450 units, Ho, : I carrying cost for an order Shou quantity of 500 units? Wantiy Anes, gcost ited tly computed i has corre order in 18. ABC Com fees it would Fae annua mearatparehase order COS OMG TT order anni oe r erespective a an = dlower carryin Sac purchase order ‘cost an igher carrying cost \ A hi der cost and hig peo ‘ vena ordercostand Be es a c_ Higher purchase jer cost and lower carryinBcOs (Q Higher purchase ord ir that a compa! 19. The amount of inventory . . variability of sales decreases: " ® cost of carrying inventory a *c. cost of running out of stoc level 4. sales level falls toa permanent lower'e ny would tend to hold in stock would iney wurchase transactions, management decides te ducts, Ti ; it mple of the company’s pro ts. To calcula economic ede quan or would need data forall ofthe following, excep“ quantity, e a. the volume of production sales. [Link] prices of the products. &._the fixed cost of ordering products. @® the volume of products in inventory. III. MULTIPLE CHOICE PROBLEMS Encircle the letter that corresponds to the best answer, 20. To evaluate the efficiency of pl cy, the oy . 7 ‘ling Clips, Inc. estimates that it will sell 10,000 porcelain clips next year. Because , = pea eainaes liwerete per-unit carrying cost of the clipsis P19, a cost of ordering is F250. Asume that Sterling wants a safety stock of 200 clips i reorders the clips based on the economic order quantity, what is Sterling’s average inven porcelain clips (round to the nearest 10 clips)? a. 350 b. 450 c. 550 d. 650 N » OneShade Company will use an estimated 50,000 units in its manufacturing processnety The carrying cost of inventory isP.04 per unit, and the cost of reordering is P50 per ordeal is the company’s economic ordering quantity (round to the nearest 100 units)? a. 11,200 b. 10,700 c. 9,700 d. 8,100 2 + Ato Bulders Corporation uses semi-hex joints in its manufacturing process. Ifthe comp total demand for the joints for next year is estimated i i os t A tobe 15,000 units, and if thecost Pe is P80, whatis the company’s economic order quantity? Assume that carrying costs 0" Joints areD.51 perunitand round off to the nearest 100 unitea 1,600 1,800 2,000 2,200 pose 4, Wheels Company will use an estimated 4,000-wheel assemblies in i is next year. The carrying cost of the whi assemblies in its manufacturing process y i ‘eel assembly inventory is P0.60 per wheel, and the ordering cost per order is P20. i A 7 ‘ ; ae ry What is the economic ordering quantity of wheel assemblies 1. 215 2. 365 3, 417 4, 516 5. Carter Company buys raw materials for its manufacturing process for P20 a part. Ten thousand partsa year areneeded. It costs P8 a year to carry one of these parts in inventory. The cost of placing a purchase order for these parts is P10. Assuming that the parts will be required evenly throughout the year, the formula for the economic order quantity is a. 2 x 10,000 x 8 10 b.W 2 x 10,000 x 10 8 c.f 10,000 x 8 10 a 10,000 x_10 8 6. The Aaron Company requires 40,000 units of Product Q for the year. The units will be required evenly throughout the year. It costs P60 to place an order. It costs P10 to carry a unit in inventory for the year. Whatis the economic order quantity? 400 600 693 490 Bose 7. Politan Company manufactures bookcases. Setup costs are P2. Politan manufactures 4,000 bookcases evenly throughout the year. Using the economic order quantity approach, the optimal production run would be 200 when the cost of carrying one bookcase in inventory for one year is a. 0.05 b. PO.10 c. PO.20 d. P0.40For thenext3 items: each from the supplier an f en yea he following B00 units etermined # 8, Garmar, Inc, has deter™ CaMfctandandonder S22) | sarsforthe year pat sere yo place purchase one" eg Catt hase order i Cost to place one Pure Coste Fry ane oF ORE ERT in units? What is Garmar'sestimated annual usage in unit a. 1,000,000 b. 2,000,000 cc. 4,000,000 d. | 3,000,000 Product A in lots of 1,200 units which x buyi y jon had been Dae 'P100; the order cost is P200 per order, Prema 5 and the 9, Barter Corporati Pan The cost per js P25. Assume that the units will be ro. ¢ any, Tequired «/t ey month's supply inventory carrying, throughout the year. W! . 144 cost for one unit A hat isthe economic order quantity? a. b, 240 <. 600 d. 1,200 a secret ingredient in its production. This ingredient costs the ¢ dd requires a 6-day lead time. The demand every quarter is 13, 680unn s 5, ny ordering cost is P12.50 per order. (EOQ is 1200 units) Neggie Corp has 10. The carrying cost per unitis a. P0.24 b. PO.95 c. PO.71 d. P0.48 a . 4 , . Te desired safety stock ifthe maximum daly usageis 175 untsis b. 822 units c. 912 units d. 1,050 units 12, the ey ‘cost amounts to b. P426 c. P576 d. P1140 13. The General Chemical: Comy ; . of caring the chong ny 8515000 gallons of hydrochloric acid per mont re y i850 cents per gallon per year, and the cost of adghout the year sical is P150 per order. The firm uses the chemical at a constant rate throu; he! er he chemical's economic order quantity s ‘a. 32,863 gallons p. 11,619 gallons c. 9,487 gallons 4. 1,900 gallons 44, TheGeneral Chemical Company uses 150,000 gallons of hydrochloric acid per ee * Of carrying the chemical in inventory is 50 cents per ‘gallon per year, and the cost Cm year. IE Shemical is P150 per order. The firm uses the chemical at a constantrate throughot Gikes 18 days to receive an order once tis placed. The reorder pointis 7,500 gallons b. 25,000 gallons c. 90,000 gallons 4d. 105,000 gallons » 46, The General Chemical Company uses 150,000 gallons of hydrochloric acid per eet The coed of carrying the chemical in inventory is 50 cents per gallon per year, and the cost of ordering the Shemical is P150 per order. The firm uses the chemical ata constantrate throughout the year. takes 18 days to receive an order once it is placed. If the ‘maximum usage is 162,000 gallons per month, the safety stock is ‘a. 625 gallons b. 7,200 gallons c. 8,125 gallons d. 97,200 gallons PROBLEMS = and has the following The ReignLyn Tags Company produces a luggage and bag tag product, information available concerning its inventory items: Annualdemand - —_50,000 units per year Purchase price 35 per package Ordering costs - 250 per purchase order Carrying costs 10% of purchase price plus: P4.50 Required: 1, Whatis the economic order quantity? (round-off final answer in whole units) 2. Whatare the total relevant costs at the economic order quantity? (use EOQ rounded-off to 5 d.p.; total relevant costs round-offto 2 decimal places) 3, What are the total relevant costs, assuming the quantity ordered equals 1,000 units? 5.2 "ABC Company sells 20,000 units of radio evenly throughout the year. The cost of carrying one unit in inventory for one year is P8, and the purchase order cost per order is P32.‘Chapter S inventory Management uired: i suantity (BOQ)? reer are company’seconomic Seon cost using the EOQ? 2. How muchis the total ordering an arrying cost f the company’s order Cay i Is 3. How muchis the total orderingand carry at 509 ~ ity 58 [Link]. has determined the following forthe coming period: lard order size P8000 , i nd Total ordering and carrying cost using the sta : PL Cost to carry one unit ee 6 Cost to place one purchase order 00 Required: . a Whats the entity's economic order quantity BOQ)? 2. Whatis the entity's estimated annual usage in units? 5.4 . _. y i in used in production is 4,050 yn} , Yana Corp's monthly material requirement used Tits 180 per unitfora supplier and itrequires 5 days lead time from the date of order to dav: ate The ordering cost is P120 per order and the carrying cost is 8% of inventory invest = de 360 days), mer nie Determine the following: EOQ Frequency of order Total inventory cost Reorder point Reorder point if maximum daily usage is 150 units Safety stock Se 55 RCR Company has secret ingredient in its production. This ingr: each from the supplier and requires 5-day lead time. The ordering cost is carrying cost per unitis 10% of purchase price. (EOQ is 2,400 units). edient costs the company P25 per order andthe Determine the following: Annual demand - Frequency of order Total inventory cost Reorder point . Reorder point if maximum Safety stock eR eNe daily usage is 1,200 units(chops nventory Management 56 Inits 2017 enna Tee) Racquel Corporation reported that it had revenues of P19.2billion, cost of goods sold of P16.8 billion, accounts receivable of P24 billion, inventory of P2.1 billion and accounts payable of P1.25 billion. Total purchases for the year was PL1.25billion. Required: 1, Whatisthe average age of inventory? 2. Whatis the amount of resources invested in inventory? 3, Determine the cash conversion cycle. 58 Fiesta Burger Company purchases 10,000 boxes of ground beef each year. It costs P10 to place each order and P5 per year for each box held as inventory. Required: , 1. Whatis the average inventory held during the year? 2. Whatis the economic order quantity for the ground beef? 3. How many orders will be made each year? 59 . Itcosts a local appliance store P5 per unit annually for storage, insurance, etc., to hold television sets in their inventory. Sales this year are anticipated to be 50 units, Each order costs P15. Required: 1. How many orders should be made during the year? 2, It takes approximately two weeks to receive an order after it has been placed. If the store insists on a one-week safety stock (assume 50 weeks), what should the inventory level be when a new order is placed? 5.10 Machine Manufacturing is involved in the production of machine parts. The company uses 500,000 pounds of steel annually. The current purchasing cost for steel is P2.20 per pound. The carrying cost for inventory is 20% of the purchase price. The cost of ordering steel is P1,000 per order. The company has decided to maintain a safety stock of 20,000 pounds. The delivery time per order is 10 days, The company works 365 daysa year. Required: 1, Determine the OQ. 2. How many orders will be placed annually? 3. What is the average inventory? 4, Whatiis the inventory reorder point? 5. How much is the company's total inventory costs for the year? 5.11 A flower shop is trying to determine the optimal order quantity of the wicker baskets that it places many of its arrangements in. The store thinks it will sell 2,000 of these baskets over the next year. The baskets cost the shop P2.00 each. The carrying costs of the baskets are P0.15 each per year. It costscomucnsnsusoet 10 to order: the shop P8.01 7 onder quanti? sisoncea year? S the . for Cry the baskets four times a year? lering Req i econo total cos te otal cost fr OF wired: 1. Whatis 2. Whats 3. Whatiisthe tot in the coming year. 1 2 sore expats 0S 2000 ams Hog SONNE YORE I co A local lamp ch lamp and P10.00 for ea carrying costs for eat A tS the Son for thelamps? sen What is the economic order sare eae 2. How many ore pees safety stock ea pas a4 pe & eceive an onde 3. Ifthe store wan! is level be when. order is aft been placed, what should the inventory Placeg2 Assur week year. ay, 548 Is (as bread) 2.6 million kilos of . buys and then sel . os of wheat heat eae rutiples of 2,000 kilos. Ordering costs, which include sme , ae syal charges of P3500, are P5000 per order. Annual carrying costsare? percent of the “ty z ° intains a safety stock of 200,000 kilos. The det, .° Put Ee of P5 per kilo. The company maintain: ty e delivery fg Required: 1. Whatisthe EOQ? . 2. At what inventory level should a reorder be placed to prevent having to draw on te si stock? 3. Whatare the total inventory costs, including the costs of carrying the safety stock? 4, The wheat processor agrees to pay the elevator removal charges if the company wil] Purcha wheat in quantities of 650,000 Kilos. Would it be the company’s advantage unis alternative? 5.14 Goodsport Sporting Goods buys baseballs at P200 per dozen from its wholesaler. They ans 36,000 dozens evenly throughout the year. The company desires a 10% return on its inven investment. In addition, rent, insurance, taxes, etc. for each dozen baseballs in inventory is 4. administrative cost involved in handling each purchase order is P100. Required: 1. Determine the EOQ in dozens aang the company ordered in order sizes of 800 dozens evenly throughout 3, Assuming thet ea atinventory costs tosell36,000dozen of baseball should the SS working days to receive the order once it is placed, determi company place an order (reordering point). Assume a 300 work days@J™ee Sanne ae ppasiecinwoniotyManngoman ll 515 - ICS Computer, Inc. must order diskettes from its supplier in lots of one dozen boxes. Given the wing information, complete the table bel i is ity of peies for the company: low and determine the economic ordering quantity © Annual demand is 2,600 dozen Cost per order placed is P7.00 Carrying cost is 15% Price per dozen is P20 ORDER SIZE (DOZENS) |__26 Number of orders 30 400 f130_{ 200} 2.600 ‘Average inventory Carrying cost ‘Order cost Total cost 5.16 a Fulton Enterprises uses 780 tons of a chemical bonding agent each year. Monthly demand fluctuates between 50 and 80 tons. The lead time for each order is one month and the economic order quantity is 130 tons. Required: p 1. Determine the safety stock appropriate for Fulton’s chemical bonding agent. 2. At what order point, in terms of tons remaining in inventory, should Fulton order the bonding agent. 5A7 ECE Company manufactures optic fibers used in the communications industry. The company’s materials and parts manager is currently revising the inventory policy for GLI, one of the chemicals ‘used in the production process. The chemical is purchased in 10-pound per can for P100 each. The firm uses 4,800 cans per year. The controller estimated that it costs the company P150 to place and receivea typical order of GLI. The annual cost of storing GLI is P4 per can. Write the formula for the total annual cost of ordering and storing GLI. Use the EOQ formula to determine the optimal order quantity. Whatis the total annual cost of ordering and storing GLI at the economic order quantity? How many orders will be placed per year? ECE’s controller, Jay Curtiz, recently attended a seminar on JIT purchasing. Afterwards he analyzed the cost of storing GLI, including the costs of wasted space and inefficiency. He was shocked when he concluded that the real annual holding cost was P19.20 per can. Curtiz then met with purchasing manager and together they contacted a supplier of GLI, about a JIT purchasing arrangement. After some discussion and negotiation, concluded that the cost of placing an order for GLI could be reduced to just P20. Using these new cost estimates, compute the new EOQ for GLI. nneweha. Usethe equation approach to compute the EOQ. b. How many orders will be placed per year? 5.18 , _ Refer to the original data given in the preceding problem for ECR Company, Peer a table showing he total annual cost of ordering and storing Gr, following order quantities: 400, 600,and 800 cans. cho 5.19 ThePolly Company wishes to determine the amount of safety stock that roan Peed sh Product D that will result in the lowest cost. The following information is available: Ould Maing “hy Stock-out cost per occurrence P80 Carrying cost per unit of safety stock P2 ‘Number of purchase orders per year 5 ‘The available options open to Polly areas follows: | Units of Probability of Running | Safety stock out of Safety stock 10 50% 20 40% 30 30% 40 20% | 50 10% 55 5% Required: Determine the number of units of ‘safety stock that will result in the lowest cost. 5.20 Confused, Inc. projected that sales willbe increased ifnew sales on account termsare oie . " 4 customers. Their present credit terms would give them P810,000 sales next year at 35% contribu terme sano: a bad debts of 1% of sales, and a receivable turnover of 9 tines, Their proposed cl term is expected to increase sales by 5%, however, bad debte may increase to 1.4% with rea turnover reduced to7 times, Required: Assuming that a 25% target rate of return was establi 7 it whet adopt the new policy or not, Exphin, as established, advise the management