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Costs Associated with Goods for Sale

Costs Associated with Goods for Sale. 1. Purchasing costs include transportation costs. 2. Ordering costs include receiving and inspecting the items in the orders. 3. Carrying costs include the opportunity cost of the investment tied up in inventory and

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Costs Associated with Goods for Sale

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  1. Costs Associated withGoods for Sale 1. Purchasing costsinclude transportation costs. 2. Ordering costs include receiving and inspecting the items in the orders. 3. Carrying costs include the opportunity cost of the investment tied up in inventory and the costs associated with storage.

  2. 4. Stockout costs occur when an organization runs out of a particular item for which there is a customer demand. 5. Quality costsof a product or service is its lack of conformance with a prespecified standard.

  3. Economic-Order-QuantityDecision Model Assumptions 1. The same quantity is ordered at each reorder point. 2. Demand, ordering costs, carrying costs, and purchase-order lead time are known with certainty.

  4. 3. Purchasing costs per unit are unaffected by the quantity ordered. 4. No stockouts occur. 5. Quality costs are considered only to the extent that these costs affect ordering costs or carrying costs.

  5. EOQ = D = Demand in units for a specified time period P = Relevant ordering costs per purchase order C = Relevant carrying costs of one unit in stock for the time period used for D

  6. Annual demand is 12,844 packages, at the rate of 247 packages per week. Video requires a 15% annual return on investment. The purchase-order lead time is two weeks. What is the economic-order-quantity?

  7. Relevant ordering cost per purchase order: $209 Relevant carrying costs per package per year: Required annual ROI (15% × $15) $2.25 Relevant other costs 3.25 Total $5.50

  8. EOQ = = 988 packages

  9. What are the relevant total costs (RTC)? RTC = Annual relevant ordering costs + Annual relevant carrying costs RTC = D Q × P + Q 2 × C DP Q + QC 2 or Q can be any order quantity, not just the EOQ.

  10. When Q = 988 units, RTC = (12,844 × $209 ÷ 988) + (988 × $5.50 ÷ 2) = $5,434 total relevant costs How many deliveries should occur each time period? D EOQ = 12,844 988 = 13 deliveries

  11. 10,000 8,000 Annual relevant total costs 6,000 5,434 Annual relevant ordering costs 4,000 Annual relevant carrying costs 2,000 600 988 EOQ 1,200 1,800 2,400 Order Quantity (Units) 20 - 15

  12. Reorder Point Reorder point = Number of units sold per unit of time × Purchase-order lead time EOQ = 988 packages Number of units sold/week = 247 Purchase-order lead time = 2 weeks Reorder point = 247 × 2 = 494 packages

  13. 988 Reorder Point Reorder Point 494 Weeks 1 2 3 4 5 6 7 8 Lead Time 2 weeks Lead Time 2 weeks This exhibit assumes that demand and purchase-order lead time are certain: Demand = 247 tape packages/week Purchase-order lead time = 2 weeks

  14. Safety Stock Safety stock is inventory held at all times regardless of the quantity of inventory ordered using the EOQ model. Video’s expected demand is 247 packages per week. Management feels that a maximum demand of 350 packages per week may occur.

  15. How much safety stock should be carried? 350 Maximum demand – 247 Expected demand = 103 Excess demand per week 103 packages × 2 weeks lead time = 206 packages of safety stock.

  16. Average inventory level of xxx 200 Orders per year 40 Average daily demand 48 Working days per year 250 Annual ordering costs 4,000 Annual carrying costs 6,000 Ralph purchases at the EOQ quantity level Determine: 1. Annual demand 2. Cost of placing an order 3. Annual carrying costs of one unit 4. The EOQ

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