3 SC- Read Case study and do MATH EQUATIONS to solve

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Problem 1
Mr. Bill Anderson, a recently hired Santa Clara MBA at the Rankin
Company, is asked by
the sales manager to assist in preparing an inventory policy for the
company. The
accountants for the company’s only product have prepared the following
information:
Cost per unit: $80
Sales per year: 15,000 units (assume that it occurs at a constant rate)
Interest rate: 10% annually
Insurance: $500 per year plus $1 per unit of average inventory/year
Taxes: $2 per unit of inventory/year
Spoilage: 2% of inventory will become obsolete due to spoilage on average
Storage: The firm leases a warehouse that holds 20,000 units. Rent is
$1,000/year.

3 SC- Read Case study and do MATH EQUATIONS to solve

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Costs of the purchasing department:
Salaries: $12,000 per year fixed plus $40 per order
Forms and Postage: $10 per order
In addition, each time an order is received, the company hires people
from a local
employment service to unload the order. On any size order, three people
are hired at $30
each per day. Bill Anderson is faced with the following questions.
i) What is the fixed cost of placing each order ($/order)? UPLOAD TO CAMINO.
ii) What is the inventory holding cost ($/unit/year)? UPLOAD TO CAMINO.
iii) What is the optimal order quantity (number of units of the
product)? UPLOAD TO
CAMINO.
iv) What is the cycle length, i.e., time between successive orders (in
days)? UPLOAD TO
CAMINO.

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v) What is the total cost of operating the inventory system (purchase
cost, fixed ordering
cost, inventory holding cost, and sunk costs) ($/year)? UPLOAD TO CAMINO.
vi) Suppose Rankin is offered a discount of 5% on the cost per unit if
2000 units are
ordered at a time. What is the total annual cost with this discount
(purchase cost, fixed
ordering cost, inventory cost and sunk costs) ($)? UPLOAD TO CAMINO.
vii)Would Rankin find it profitable to take the discount? UPLOAD TO CAMINO.
viii) For what minimum discount rate (on orders of size 2000) will
Rankin be indifferent
between taking the discount and rejecting it (%)?UPLOAD TO CAMINO.
Problem 2
Millennium Liquors is a wholesaler of sparkling wines. Their most
popular product is
the French Bete Noire of 1989. Weekly demand is for 45 cases. Assume
that demand
2

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occurs over 50 weeks per year. The wine is shipped directly from France.
Millennium’s
annual cost of capital is 15 percent, which also includes all other
inventory-related costs.
Below are relevant data on the costs of shipping and handling. These
costs include the
usual ordering and handling costs, plus the cost of refrigeration, which
includes a fixed
component (mainly depreciation of the cooling equipment) and a variable
component that
depends on the number of cases in inventory.
 Cost per case: $120
 Shipping cost (for any size shipment): $290
 Cost of labor to place and process an order: $10
 Cost of labor to place cases into warehouse: $2/case
 Cost of labor to pick case when sold: $2/case
 Fixed cost for refrigeration: $75/week
 Variable cost for refrigeration: $3/case/week
i) What is the weekly holding cost for one case of wine ($/case/week)?
UPLOAD TO
CAMINO.
ii) Use the EOQ model to find the number of cases per order. UPLOAD TO
CAMINO.
iii) What is the optimal number of inventory turns for this product:
(Inventory turns = average annual unit sales / average inventory .