Tuesday, September 17, 2013

Inventory Model

An inventory is a stock or store of goods,  It may be thought of as a resource or a list of some category of materials, machines, people, money or information for some organizational unit at some time.  Proper inventory management is an essential function of all business operations. Most of the problems in inventory fall into one of the following categories A. The proper quantity of inventory to order at any given time (How much to order? B. the proper time to order the quantity (When to order?).  Four basic costs are associated with inventories: purchase cost; holding or carrying cost; ordering costs and shortage cost.  Annual cost of inventory is the sum of the annual ordering cost and annual carrying cost.

1. Holding or carrying cost relates to physically holding items in storage.  This cost is proportional to the amount of inventory and the time over which it is held.  They include interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage, and warehousing cost (heat, light, rent, security).

2.  Ordering or set up costs are costs associated with ordering and receiving inventory.  This cost is incurred whenever an inventory is replenished.  These costs include determining how much is needed, typing up invoices, inspecting goods upon arrival for quality and quantity, moving the goods to temporary storage.

3.  Purchase or Direct Production cost is for vendor supply environments or direct production cost in case of items produced by user.  In either situation the unit cost may be constant for all replenishment quantities, or it may vary with the quantity purchased or produced.

4.  Shortage costs result when demands excess the supply of inventory on hand.  The cost can include the opportunity cost of not making a sale, loss of customer goodwill, lateness charges, and similar costs. Furthermore, if the shortage occurs in an item carried for internal use, the cost of lost production or downtime is considered a shortage cost.

Exercises

1.  Suppose that MYCOLA company has a beverage product that has a constant annual demand rate of 7200 cases.  A case of soft drink costs P288.  Ordering cost is P200 per order and inventory carrying cost is charged at 25% of the cost per unit.  Identify the following aspects of the inventory policy: a) economic order quantity; b) annual carrying cost; c) total annual cost

2.  Electronic village stocks and sells a particular brand of personal computer.  It costs the store P450 each time it places an order with the manufacturer for the personal computers.  The annual cost of carrying the PCs in inventory is P170.  The store manager estimates that annual demand for the PCs will be 1200 units.  Determine the optimal order quantity and the total minimum inventory cost.

3. The Docs Company purchases a component used in the manufacture of automobile generators directly from the supplier.  Docs's generator production operation which is operated at a constant rate, will require 10,000 components per month throughout the year (120,000 units annually).  Assume ordering cost at P2500 per order, unit cost is P40,000 per component, and annual inventory holding costs are charged at 20%.  Answer the following: a) WHat is the EOQ for this componet?; b) What are the total annual inventory holding and ordering costs associated with the recommended EOQ?

4.  Mimi Corporation has an annual sales of 9000 CD's.  Each inventory item has a value of P200.  Ordering cost is P400 per order.  Carrying cost is 25% of average inventory value.  Find the following: a) optimal number of order per year; b) prior order quantity; c) annual carrying and ordering costs; d) total annual cost.

5.  The annual inventory requirement at the Q and A Enterprises is 14400 units.  Price is P60 per unit.  Ordering cost is P800 per order.  Carrying cost is 25% of average inventory.  Find the following a) economic order quantity; b) annual carrying cost; c) annual ordering cost; d) total annual cost.

6.  The K and V Company is panning to stock its product which is classified as an inventory item.  The company has developed the following information: annual usage is 16,200 units, cost of the inventory per unit is P730; ordering cost is P220 per order; carruing cost is 28% of inventory value per year.  Determine the optimum number of units per order.

7.  The Atlantic Paper company produces paper from wood pulp, which it purchases from the Adirondack Lumber Products Company.  Atlantic needs 450,000 pounds of wood pulp per year (365 days) to meet its customers' demand for paper.  Each order of pulp costs Atlantic P700, and it costs 0.30 per pound per year to carry a pound of pulp in inventory.  It takes 8 days for Atlantic to receive an order from the Adirondack Company.  Determine the following: a) economic order quantity; b) minimum total annual inventory cost.



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