Question 1. RFC of Dearborn, Michigan buys and sells office furniture. One of its best-selling items is ergonomic chairs, which RFC purchases from its supplier at a unit cost of $100. The annual demand over the past few years has been quite consistent and is forecasted to be 12500. The ordering cost per order is $200 and the annual inventory carrying cost is 5%. Each chair weighs 15 pounds. The supplier operates 360 days in a year.
(a) What is the EOQ for RFC in units?
(b) Recently, the chair supplier relocated its distribution center to Savannah, George in response to this relocation, RFC is considering two shipping options. Assume the in-transit inventory carrying cost is 1.8%. The supplier offers two options:
- Option 1: FOB-origin. Delivery time is 2 days. Motor carrier rate is $0.08 per unit with a minimum of 30000 pounds per shipment, or $0.1 per unit otherwise.
- Option 2: FOB-destination. Delivery time is 5 days with a minimum of 45000 pounds per shipment.
What is the total possible min annual cost for Option 1? Should RFC accept the volume rate?
What is the total annual cost for Option 2? Please complete the income statement for RFC based on option 2. (Handwritten for the income statement is okay)
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Income Statement
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Sales
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$2,000,000
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Cost of goods sold
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$1,275,000
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Gross margin
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$725,000
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Transportation cost
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$
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Warehousing cost
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$ 6000
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Inventory (carrying) cost
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$
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Other operating costs
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$1500
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Total operating cost
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$
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$ ___
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Earnings before interest and taxes
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$ ____
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Interest
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$15,000
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Taxes
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$7,000
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Net Income
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$
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To minimize the total annual cost, which option should RFC use? What is the total annual cost related to inventory for RFC then?
(c) From a buyer's (buying firm's) perspective, do you think the price quote of these two options offered by the supplier is reasonable? Why or why not? Be specific in your discussion.
(d) Instead of relying on the shipping company in collaboration with the supplier, RFC also considers leasing private fleets which also has a 2-day delivery time but has a fixed charge per trip, Tc.
Under what circumstance the leasing option would be cost justifiable? [Hint: What is the highest Tc RFC can pay but still save money? ]
Question 2.
The manufacturer RFC has two warehouses, Alpha and Beta, to ensure its geographic coverage. Alpha currently has 45 units and its average daily demand is 5 units; whereas Beta currently has 80 units and its average daily demand is 14 units. RFC currently have 500 units of stock to deploy. How should RFC split these 500 units between Alpha and Beta?
Question 3.
In an effort to cut cost, Kellogg Co., the maker of Cheez-Its and Keebler cookies, is abandoning its traditional way of delivering some snacks to individual stores, and will begin delivering its U.S. crackers to a central warehouse instead.
Assume that in this plan, Kellogg starts its experiment with two major product groups (A and B), in two markets (1 and 2), and the central warehouse will adopt a (s,S) policy.
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Product
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Average demand (in carton)
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STD
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Unit weight per carton
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s
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S (in carton)
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Average inventory (in carton)
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Market 1
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A
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39.3
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13.2
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100lb
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65
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197
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91
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Market 2
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A
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38.6
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12
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100lb
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62
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193
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88
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Market 1
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B
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1.125
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1.36
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150lb
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4
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29
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14
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Market 2
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B
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1.25
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1.58
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150lb
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5
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29
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15
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Centralized Warehouse
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A
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77.9
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20.7
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100lb
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118
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304
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132
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B
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2.375
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1.9
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150lb
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6
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39
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20
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The transportation cost for local delivery is $1.05 per cwt, and $1.1 per cwt for centralized warehousing practice. Each carton has 1000 units of the product. The unit value of product A and B is 0.8 and 0.5 respectively. Do you think Kellogg will indeed cut cost with this new distribution method? If so, what is the maximum operating cost for this central warehouse?