Paramount Limited is reviewing the purchasing policy for one of its raw materials due to a reduction in production requirements. The material used evenly throughout the year is used for the company's products, the production of which is currently 285,000 units annually. Each finished unit of the product contains 0.4 kg of this material. 5% of the material is expected to be lost in the production processes. Purchases are usually made through Letters of Credits and can be made in multiples of 1,000 kg, with a minimum purchase order quantity of 1,000 kg. The cost of this raw material depends upon the purchase order quantity as follows: Order quantity (kg) Cost per kilogram ($) 1,000 2,000 3,000 4,000 6,000 12,000 10.00 9.80 9.65 9.50 9.35 9.20 The costs of placing and handling each order are $1,200, of which $300 is an apportionment of this cost which is not expected to be affected in the short term by the number of orders placed. The annual storage cost of stock is $20 per unit, of which only $16 is expected to be affected in the short term by the amount of stock held. The company expects the machine setup cost for each production run to be $450, and the estimated cost of pilferage is $5 per unit per annum. The bank will charge $250 for the bill processing fee for each transaction, and the company also estimates $3 per unit to prevent deterioration per annum. In addition, the lead time for the raw material is one month, and a minimum of 10,000 kg of safety stock is required.
Paramount Limited is reviewing the purchasing policy for one of its raw materials due to a reduction in production requirements. The material used evenly throughout the year is used for the company's products, the production of which is currently 285,000 units annually. Each finished unit of the product contains 0.4 kg of this material. 5% of the material is expected to be lost in the production processes. Purchases are usually made through Letters of Credits and can be made in multiples of 1,000 kg, with a minimum purchase order quantity of 1,000 kg. The cost of this raw material depends upon the purchase order quantity as follows: Order quantity (kg) Cost per kilogram ($) 1,000 2,000 3,000 4,000 6,000 12,000 10.00 9.80 9.65 9.50 9.35 9.20 The costs of placing and handling each order are $1,200, of which $300 is an apportionment of this cost which is not expected to be affected in the short term by the number of orders placed. The annual storage cost of stock is $20 per unit, of which only $16 is expected to be affected in the short term by the amount of stock held. The company expects the machine setup cost for each production run to be $450, and the estimated cost of pilferage is $5 per unit per annum. The bank will charge $250 for the bill processing fee for each transaction, and the company also estimates $3 per unit to prevent deterioration per annum. In addition, the lead time for the raw material is one month, and a minimum of 10,000 kg of safety stock is required.
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter20: Inventory Management: Economic Order Quantity, Jit, And The Theory Of Constraints
Section: Chapter Questions
Problem 7E: Ottis, Inc., uses 640,000 plastic housing units each year in its production of paper shredders. The...
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