Sturdivant Sound Systems manufactures and sells sound systems for both home and audio. All parts of the sound systems, with the exception of CD players, are produced in the Rochester, New York, plant. CD players used in the assembly of Sturdivant's systems are purchased from Morris Electronics of Concord, New Hampshire.
The purchasing agent for Sturdivant Sound Systems submits a purchase requisition for the CD players once every four weeks. The company's annual requirements total 5,000 units (20 per working day), and the cost per unit is $60. (Sturdivant does not purchase in greater quantities because Morris Electronics, the supplier, does not offer quantity discounts.) Rarely does a shortage of CD players occur because Morris promises delivery within one week following receipt of a purchase requisition. (Total time between date of order and date of receipt is 10 days).
Associated with the purchase of each shipment are procurement costs. These costs, which amount to $20 per order, include the costs of preparing the requisition, inspecting and storing the delivered goods, updating inventory records, and issuing a voucher and a check for payment. In addition to procurement costs, Sturdivant Sound Systems incurs inventory carrying costs (aka Holding Costs) that include insurance, storage, handling, taxes, and so forth. These costs equal $6 per unit per year.
Beginning in December of this year, management of Sturdivant Sound Systems will embark on a companywide cost control program in an attempt to improve its profits. One area to be closely scrutinized for possible cost savings is inventory procurement.
a. Compute the EOQ (aka Optimal Order quantity) of CD players.
b. Determine the appropriate reorder point (in units).
c. Compute the costs savings that the company will realize if it implements the optimal order inventory procurement decision.