1. Demand for Stick disposable razors at Buyright Drugs averages seven packages per day. The razors cost Buyright $0.80 per package and sell for $1.49. Buyright uses a 20% annual holding cost rate and estimates the cost to place an order for additional razors at $25. Buyright is open 365 days a year, has an average demand of 10 packages per day, and desire a safetystock of 25 packages. The lead time for delivery is five days. Determine the following:
a. The optimal inventory policy (order quantity and reorder point) for Stick razors.
b. The number of days between orders (cycle time).
c. The total annual inventory cost (holding, ordering, and procurement) and the projected annual net profit of this policy.
2.Bee's Candy manufactures a variety of candy bars in a number of different sizes. One of its more popular products is the three-ounce Smirk bar. Bee's forecasts that demand for this product should be fairly constant over the next year, totaling 21 million bars.
The candy production line, which operates 24 hours a day, 365 days a year, is capable of producing three candy bars per second and per unit cost is $1.00. A production setup for the three-ounce Smirk bar takes 50 minutes and costs approximately $450. The annual holding cost of a three-ounce Smirk bar is estimated as $0.12.
a. What is the optimal production batch size and the length of a production run in hours (including setup time)?
b. What is the total annual inventory holding and production setup cost for this policy?
c. What is the number of days between the start times of successive production runs?
d. How would your answers to part (a) change if the annual holding cost decreased to $0.10 per bar?
3. Jackson Mint produces collectible plates. It has recently contracted with the estate of well-known artist, Skip Gunther, to produce a series of five commemorative plates bearing copies of the artist's most famous pictures. The plates will be sold by subscription at a cost of $300 plus shipping and handling for the entire five-plate series. Jackson estimates the cost of producing each plate in the series at $12.50 plus a $9.75 royalty that Jackson has agreed to pay the Gunther estate.
Jackson intends to mount a $175,000 nationwide advertising campaign promoting these plates as a "limited edition"; that is, Jackson "'ill specify the number of plates it will produce and limit production to that amount. Any unsold plates will be destroyed. Based on its previous experience with such products, Jackson estimates that customer demand for the series will be approximately normally distributed, with a mean of 1800 and a standard deviation of 250.
If Jackson has more subscribers than plate it will refund subscribers' money with a note explaining that the series has been over subscribed. Reasoning that the unsatisfied customers will be more willing to subscribe to Jackson's future offerings, it estimates that each unsatisfied customer will earn the company an average of $40 in discounted future profits.
a. What is the optimal number of Skip Gunther series Jackson should produce?
b. What expected profit or loss will Jackson earn if it follows the production policy found in part (a)?
4. Clark Equipment distributes the Clanton Model 406 bread slicer used in bakeries. The slicers cost $250 each, and Clark sells them to net $310 after marketing and related expenses. The company estimates that the annual demand for this product is 450 units. The policy at Clark has been never to allow stockouts intentionally, and the company has carried a safety stock of 30 units in order to protect against such occurrences. Because of mounting fiscal pressure, however, Clark is considering eliminating the safety stock for the bread slicers and adopting a policy that allows for stockouts.
Clark estimates that it will suffer a customer goodwill loss of $25 per week for each week a customer must wait for a back ordered bread slicer. Clark also believes that there is an administrative cost of $30 in handling a backorder and that adopting such a policy would result in a 4% decrease in annual sales of the bread slicer. Clark uses a 15% annual inventory holding cost rate, and the cost of ordering slicers from Clanton is $180. Delivery lead time is 10 working days, and Clark is open 250 days a year.
a. Determine the optimal order quantity, re-order point, and annual profit under the current policy of not intentionally allowing backorders.
b. Determine the optimal order quantity, reorder point, and annual profit if Clark intentionally allows for backorders.
c. What is your recommendation to management as to whether Clark should intentionally allow for backorders? Justify this recommendation.