BIM Computers Inc. sells its popular PC- PAL model to distributors at a price of $ 1,250 per unit. BIM’s profit margin is 20%. Factory orders average 400 units per week. Currently, BIM works in a batch mode and produces a four- week supply in each batch. BIM’s production process involves three stages:
• PC board assembly ( the automatic insertion of parts and the manual loading, wave soldering, and laser bonding of electronic components purchased from outside sources)
• Final assembly
• Testing When the firm wants to change production from one model to another, it must shut down its assembly line for half a day, which translates into four working hours. The company estimates that downtime costs half an hour of supervisory time and an additional $ 2,000 in lost production and wages paid to workers directly involved in changeover operations. Salaries for supervisory personnel involved amount to $ 1,500 per day. Although BIM products are generally regarded as high quality, intense price competition in the industry has forced the firm to embark on a cost- cutting and productivity improvement campaign. In particular, BIM wants to operate with leaner inventories without sacrificing customer service. Releasing some of the funds tied up in outputs inventory would allow BIM to invest in a new product development project that is expected to yield a risk- adjusted return of 20% per annum. Assume 50 workweeks in a year and five working days in a week.
a. Determine BIM’s total annual cost of production and inventory control.
b. Compute the economic batch size and the resulting cost savings.