Buffalo Falls Ltd manufactures among other things, glass table tops. It uses a just-in-time system of production for its table tops. However it orders the glass used in production in bulk. The glass takes up a lot of space in the company's warehouse, and often is damaged during storage. Consequently Buffalo Falls has decided to trial a Just-in-Time (JIT) purchasing system. The following data relate to this system.
• Demand for table tops is estimated to be 9,000 units for the coming year.
• Currently, each table top requires on average ½ a sheet of glass. This includes an amount for scrap and reworks. Under the JIT system, scrap and reworks are expected to be minimal; therefore only 1/3 a sheet of glass is expected to be used per table top. (one)
• Each sheet of glass currently costs $60. This will not change under JIT.
• Currently Buffalo Falls orders glass in lots of 1,000 sheets. With the introduction of JIT this will fall to 50 sheets.
• Each order costs $100, but will fall by 50% under JIT.
• Damaged inventory is estimated to be on average $5 per average unit held. This will not be incurred under JIT.
• Other carrying costs amount to $60 per unit. This will not change if JIT is introduced.
• Buffalo Falls will not need as much warehouse space, therefore will lease 75% of an existing warehouse to another firm for $2 per square metre. The warehouse has 30,000 square metres. (five)
• Three employees who currently earn $30,000 each will be directly affected by the just-in-time adoption decision. Two will be transferred to other positions within Buffalo Falls; one will be fired. (six)
• Buffalo Falls expects that it will lose sales amounting to 250 table tops with the introduction of JIT. Selling price of these items will be $200 per item, and variable costs per item will be $60 and fixed costs will be $20 per item. (eight)
• Assume Buffalo Falls has a required rate of return of 30% per annum.
Required:
a) Calculate the Economic Order Quantity for glass.
b) Calculate total annual cost of ordering and carrying the glass.