After inheriting some money, Chris Jones had some additional cash to invest in a business. The most promising opportunity at the time was in building supplies, so one of the businesses Jones decided to purchase specialized in sales of a very popular nail, used to hold together a variety of building structural components. The special nails retailed at $12.50 per carton and the monthly estimateddemand for nails was 83.34cartons, but Jones was uncertain how to space out his orders and how much to order each time. Initially, only two costs concerned him – order processing costs, which were $25 per order (regardless of order size), and annual warehousing (average inventory holding/carrying) costs, which were estimated at 10% of the item (carton) unit price. Jones had to rent warehouse space for the year, sufficient to accommodate the entire order of cartons of nails, each time an order arrived. He decided not to worry about safety stock, because he assumed the demand was fairly even and predictable. He was also informed that the time between placing an order and receiving it would be 5 days
CASE QUESTIONS: Please, clearly show all equations, values and computations. Just answers, without your showing the underlying equations, calculations and values used to arrive at your answer, will not be accepted.
1. Using the EOQ method discussed in chapter 7 (pdf of the chapter is in Google classroom), and also discussed in class, how many cartons of nails should Jones order, each time?
2. Given the above lead time, what should Jones’s reorder point be? Calculate. In other words, at what level of inventory should he place the order for more cartons, in order to not run into a stock-out situation?You can round to the nearest carton.
3. While Jones was doing some calculations and thinking about the above issues, a report came on TV that mentioned that home mortgage rates were about to be decreased further. Jones realized that this meant that the home construction (and building supplies industry) should see increased demand. Should Jones now be concerned about stock-out situations and safety stock? If he carries safety stock will his costs increase? What sorts of costs would be incurred in carrying excess inventory? On the other hand if he decides not to carry safety stock what sort of risks/problems might he incur? Explain.
4. Compute Jones’s total inventory annual cost, i.e. annual cost of purchased inventory + annual holding costs + annual ordering costs. Assume that each time Jones places an order, he orders the Economic Order Quantity (EOQ).
5. Suppose now, that Jones’s supplier offers a quantity discount as follows – for orders of 220 or more cartons of nails, the supplier will give a 10% discount on the order-processing cost. Compute what will Jones’s new EOQ be with the discounted order-processing cost? Will he be able to take advantage of this discounted offer? Why or why not? Explain.
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