A magnet manufacturer purchases copper on the open market at monthly intervals throughout the year. The best estimate of the average price for the next year is $1.10 per lb. A fixed quantity of 25,000 lb per month is needed to meet the expected requirements for a four-month planning horizon. Inventory carrying cost is 20 percent per year.
(a) Develop a dollar-averaging budget for future purchases.
(b) Suppose, at the time of the purchases, the actual prices per pound for the next four months turn out to be $1.32, $1.05, $1.10, and $0.95, respectively. If dollar averaging is used, what quantities should be purchased in each month? Is there any advantage over a hand-to-mouth strategy?