Exam 20: Inventory Cost Management Strategies

A trigger point refers to the inventory level at which a reorder is generated.

Which of the following factor(s) would not cause a reduction in the EOQ?

Answer the following question(s) using the information below: The Wood Furniture company produces a specialty wood furniture product, and has the following information available concerning its inventory items: Annual demand is 10,000 packages per year. The purchase price per package is $16. -If Jackson Collectibles, Inc. has a safety stock of 35 units and the average weekly demand is 14 units, how many days can be covered if the shipment from the supplier is delayed?

The following information has been gathered for Product A: What is the reorder point?

Stanford Ltd. purchases 1,600,000 units of its product every year. The ordering costs are $50 per order and the annual carrying cost of one unit is $1.60. Under its current inventory policy, it purchases the units 80 times during the year (in batches of 20,000 units per order). Required: a. Calculate the EOQ for Stanford Ltd. b. By ordering at the EOQ, how much in inventory costs will Stanford save per year?

Shrinkage is measured by comparing the cost of inventory on the books to the cost of inventory physically counted.

A trigger point is defined as

Criticism of backflush accounting included all of the following EXCEPT

Owen-King Company sells optical equipment. Lens Company manufactures special glass lens. Owen-King Company orders 5,200 lens per year, 100 per week at $20 per lens. Lens Company covers all shipping costs. Owen-King Company earns 30% on its cash investments. The purchase-order lead time is 2.5 weeks. Owen-King Company sells 125 lens per week. The following data is available: What is the economic-order quantity for Owen-King Company?

A jeweller orders gems in lot sizes of 1,250 gems. The annual demand for emeralds is 6,250 gems. Ordering costs are $200 per order and carrying costs are $10 per unit annually. Required: a. Determine the economic order quantity. b. Determine the amount of annual cost savings if the company changes from an order size of 1,250 units to the economic order size. c. One supplier offers a discount of $2 per unit off the purchase price of orders in lots of 625 units or more. What impact would this have on the EOQ and should the order size be changed?

The costs associated with storage are an example of which cost category?

Just-in-time purchasing requires organizations to place smaller purchase orders with their suppliers.

The Jarvis Corporation produces bucket loader assemblies for the tractor industry. The product has a long term life expectancy. Jarvis has a traditional manufacturing and inventory system. Jarvis is considering the installation of a just-in-time inventory system to improve its cost structure. In doing a full study using its manufacturing engineering team as well as consulting with industry JIT experts and the main vendors and suppliers of the components Jarvis uses to manufacture the bucket loader assemblies, the following incremental cost-benefit relevant information is available for analysis: The Jarvis cost of investment capital hurdle rate is 15%. One time cost to rearrange the shop floor to create the manufacturing cell workstations is $275,000. One time cost to retrain the existing workforce for the JIT required skills is $60,000. Anticipated defect reduction is 40%. Currently there is a cost of quality defect assessment listed as $150,000 per year. The setup time for each of the existing functions will be reduced by 67%. Currently the forecast for setup costs are $225,000 per year. Jarvis will expect to save $200,000 per year in carrying costs as a result of having a lower inventory. The suppliers will require a 15% premium over the current level of prices in order to position themselves to supply the material on a smaller and more frequent schedule. Currently the materials purchases are $1,500,000 per year. Required: Determine whether it is in the best interest of Jarvis Corporation to install a JIT system.

Traditional budgeted and standard costing systems use

A positive aspect of backflush costing is the presence of the visible audit trail.

Owen-King Company sells optical equipment. Lens Company manufactures special glass lens. Owen-King Company orders 5,200 lens per year, 100 per week at $20 per lens. Lens Company covers all shipping costs. Owen-King Company earns 30% on its cash investments. The purchase-order lead time is 2.5 weeks. Owen-King Company sells 125 lens per week. The following data is available: What is the reorder point?

Arrow Manufacturing Ltd. distributes golf clubs. Its annual demand for next year is forecasted at 14,000 sets at an average cost of $425 per set. In reviewing its historical ordering costs for the past 3 years it noted that costs were $12,900, $16,400 and $20,100 at order volumes of 20, 50 and 80 respectively. Arrow is forecasting an increase of 10% in its fixed ordering costs and a 15% increase in its variable ordering costs. The fixed ordering costs relate to allocations of supervisory time, computer time, and warehouse space. In addition to the order processing, the company must receive and inspect the units. Receiving and inspecting activities require 5 hours per order at a direct labour rate of $12 per hour. Variable overhead related to receiving and inspecting activities is applied at a rate of 40% of direct labour dollars. In reviewing its other activities, Arrow came up with the following estimates for next year: The company is closed for two weeks in the summer and again for 2 weeks over Christmas. This results in 48 work weeks in the year and the company operates 5 days per week. Required: a. Determine the Economic Order Quantity (EOQ) for Arrow for next year. What are the total annual inventory costs at the EOQ? b. Determine the reorder point in units assuming that the lead time is 7 days. c. Now assume the company has found a new supplier that is willing to supply on a just in time basis. Inspection and receiving time would be lowered to 1.5 hours per order and the annual estimated damage would be cut by 75%. Storage and inventory insurance would drop to $4.50 and $0.60 respectively. The variable ordering cost would drop to $65 due to integrated ordering systems. However, the annual cost to purchase the golf sets will increase to $428. Determine the new EOQ. Should the company go with the new supplier or maintain its current arrangements?

Use the information below to answer the following question(s). Movie Time is a distributor of DVDs. Video Mart is a local retail outlet which sells blank and recorded DVDs. Video Mart purchases DVDs from Movie Time at $5.00 each; the units are shipped in packages of 25. Movie Time pays all incoming freight, and Video Mart does not inspect the DVDs due to Movie Time's reputation for high quality. Annual demand is 104,000 DVDs at a rate of 2,000 units per week. Video Mart earns 15% on its cash investments. The purchase-order lead time is one week. The following cost data are available: -What are the total relevant inventory costs?

Primary components that manufacturers would use to evaluate suppliers under a just-in-time system would include all of the following EXCEPT

Kretzinger Company makes extensive use of financial performance reports for each of its departments. Although most departments have been reporting favourable cost variances with the company's current inventory system, management is concerned about the overall performance of the purchasing and production departments. For example, the following information is for the purchasing of materials for a product the company has been manufacturing for several years: Required: a. Compute the inventory turnover for each year. Can any conclusions be drawn for a yearly comparison of the purchase price variance and the inventory turnover? b. Identify problems likely to be caused by evaluating purchasing only on the basis of the purchase price variance. c. Management has been relying almost exclusively on variances for performance measurement. What recommendations can you suggest to improve the evaluation process?