Leather is a natural product and is sold typically as full or half hides. The average hide covers 50 square feet; however, hides can range from 35-to-75 square feet. On average the Kysons pay $125 for the hides, including materials overhead and labor. The inbound freight cost is $8.00; labor to receive each hide and maintain it in inventory cost $5, plus $1 per month. Storage space cost $0.05/sq. ft. per month. The Kysons have decent credit and are able to borrow at and APR of 6%. The Kyson’s figure that insurance per hide runs about $0.25 per hide; taxes run about $2 per $100 value with a 30% tax rate; loss and damage runs about 4% per year; obsolescence runs 2% per year.

While Mike and Kelly decide on the colors and quantity of hides, the actual ordering is Janet’s responsibility. Janet is their office manager. Janet earns around $700 per week (including salary and fringes) and spends half of her time processing orders and processes an average 4 orders per week.

After operating their website for two months the Kysons hired you as a consultant to stream-line their ordering and inventory process. Over the most recent 4-week period, the Leather Hide Store had the following daily demand for hides:

	Week-1	Week-2	Week-3	Week-4
Monday	20	32	32	18
Tuesday	33	33	27	35
Wednesday	31	21	26	28
Thursday	30	29	29	34
Friday	24	30	21	27

Over the same 4 week period, they had 16 orders with the following order cycle times: 5, 3, 2, 7, 3, 3, 4, 3, 7, 6, 5, 4, 3, 3, 3, 2, and 5 days.

After running the website for a year, the Kysons were very pleased with your earlier analysis. Now they want you to analyze their inventory requirements. The first phase consists of an ABC analysis of their product lines. Unfortunately, the Leather Hide Store does not have demand data per day according to product number or name; however, they do have the following demand information over the first year.

Product Number	Product Name		Units Sold	Price per Unit	Profit per Unit
ES1	Indigo		624	$245.70	$67.76
ES2	Black Cat		260	$167.40	$23.16
ES3	Black Magic		1282	$206.70	$35.50
ES6	Black Pebble		312	$167.40	$16.42
ES7	True Red		520	$245.70	$54.28
ES10	Roasted Red Pepper		312	$152.00	$19.90
ES13	True Burgundy		468	$171.60	$15.23
ES14	Pure Sand		104	$175.50	$16.44
ES18	Polo Brown		1560	$198.00	$20.06
ES19	Cheyenne		412	$247.00	$79.85
ES20	Harvest		936	$222.30	$55.15
ES26	Soft White		208	$202.80	$34.30
ES31	Soft Cream		282	$179.40	$23.03

Case Questions

1. What is the inventory carrying rate?
2. What is the current number of orders per year if Janet is making 4 orders per week?
3. What is the economic order quantity
4. What will be the number of orders per year based upon the economic order quantity
5. What is the reorder point (use 99% service level)
6. Using the information in the case to perform and ABC analysis
   1. How would you perform the ABC analysis and what criteria would you use?
   2. What would be your cut-off level?
   3. Make sure to explain your reasoning and support your solutions.

Note: To determine the average demand and standard deviation of the demand and the average lead time and the standard deviation of the lead time, use the data given in the case.

Answer rating: 100% (QA)

To answer your accounting questions lets go through each one step by step 1 Inventory Carrying Rate The inventory carrying rate is the cost incurred t... View the full answer