Accg301 Week 5 Tutorial Answers

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Suggested answers of the tutorial questions

EXERCISE 15.25
1

Safety stock: 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. Average monthly usage is 70 tonnes (840/12), and the maximum usage is 80 tonnes. Therefore, the safety stock is 10 tonnes (80 – 70).

2

Reorder point: The reorder point is 80 tonnes. This is the maximum amount of the chemical that would be used in a month, and this is the time that it takes to receive an order after it is placed. ROP

= (inventory used per period of time x order lead time) + safety stock = (70 tonnes x 1 month) + 10 tonnes
= 80 tonnes

PROBLEM 15.35
1

Economic order quantity

=

( 2)( annual requiremen t )( cost per order )
annual carrying cost per unit

=

(2)(4 800)($150)
$4

=

2

360 000 = 600

Using the formula given for requirement 1:
Total annual cost of ordering and storing
XL-20

 4 800 
 600 

 $150  
 $4 
600 
2

=
$2 400
Note that this cost does not include the actual cost of XL-20 purchases (i.e. the quantity purchased multiplied by the price).
3

Orders per year:
Number of orders per year

=

=

annual requiremen t



order quantity

4

4 800

8

600

Using the new cost data:
(a)

EOQ

=

(2) (annual requiremen t) (cost per order)
annual carrying cost per unit

=

(2)(4 800)($30)
$20

=
(b)

Number of orders per year

=

14 400 = 120
annual requiremen t
order quantity

=

40



4 800
120

PROBLEM 15.36
1

The reorder point is calculated using the initial data in P15.35. That is, the new data in requirement 4 of P15.35 is disregarded.
Reorder point:
annual usage
Monthly usage
=
12
=

4 800

= 400 canisters

12
Usage during one-month lead time
=
400 canisters  1 month
Reorder point
=
400 canisters
The chemical XL-20 should be ordered in the economic order quantity of 600 canisters when the inventory level falls to 400 canisters. In the one month it takes to receive the order, those 400 canisters will be used in production.

2

Graph of usage, lead time and reorder point:

3

Safety stock and new reorder point:
Monthly usage of XL-20 fluctuates between 300 and 500 canisters. Although average monthly usage still is 400 canisters, there is the potential for an excess usage of 100 canisters in any particular month. The safety stock of XL-20 is equal to the potential excess monthly usage of 100 canisters. With a safety stock of 100 canisters, the reorder point is 500 canisters (400 + 100). The Materials and Parts Manager should order the EOQ of 600 canisters when the inventory of XL-20 falls to 500 canisters. During the one-month lead time, another 300 to 500 canisters of XL-20 will be used in production.

4

The purchasing manager, Kaplan, would have approached the supplier to setup a JIT purchasing arrangement that would reduce the cost of ordering from $150 to just $30. In order to convince the supplier to agree on the JIT purchasing agreement, Rally Communications Company would reduce the number of suppliers, commit to a long-term contract with this supplier and implement e-commerce

applications that would allow the supplier to place orders on line and to access Rally’s inventory records . Rally would also specify quality standards in the supplier’s contract to minimise quality inspections on all deliveries. These actions would translate into savings in ordering costs.

PROBLEM 15.37
1

(a)

The ordering cost per order is composed of the following costs: Inspection fee
Direct labour: receiving clerk (4 hours  $24.00)
Variable overhead (4 hours  $6.00)
Processing cost*
Total ordering cost per order
* Processing cost per order

=

$47.00
96.00
24.00
5.80
$172.80

change in ordering cost
change in number of orde rs
$12 700  $12 300

=

=

97  17

$400
80

=
Recognition of 16% cost...
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