Suppose that American Technology Corporation can allow shortages for the product used in the business case, at
Question:
Suppose that American Technology Corporation can allow shortages for the product used in the business case, at a cost of $4 per unit per year. Construct a new spreadsheet model.
American Technology Corporation is in the process of improving its management practices to increase productivity. American Technology Corporation keeps several thousand items in inventory and the decision about how much inventory to keep is left to the field operations people. Inventory cost reduction is one of the key components of the overall strategy. In order to estimate the potential cost reduction, one particular product out of thousands was chosen and the pertinent data appears below.
Annual demand = 1600 items
Purchasing (ordering) costs = $25 per order
Annual hold cost = 25%
Cost of each item = $4
Number of work days = 320 per year
Lead-time = 6 work days
The first suggestion made was to use the economic order quantity models to minimize cost. The estimated current cost of ordering, plus holding, is $500 per year. How much money will American Technology Corporation save if the EOQ model is used?
The financial group has come up with a plan to reduce the cost of operating capital that in turn will reduce the holding cost from 25% to 22%. How much additional saving can be made from this effort?
The purchasing group has been negotiating with vendors. The vendor for this product has offered American Technology Corporation a discount of 2%, 5%, or 10% if the quantity purchased in one order is at least 400, 800, or 1600 items respectively. Which discount level should American Technology Corporation choose and how much money will it save by doing so?
Finally, the management wants to know to know the effect of implementing both these savings options.
Accounting
ISBN: 978-0324662962
23rd Edition
Authors: Jonathan E. Duchac, James M. Reeve, Carl S. Warren