Sturdivant Sound Systems manufactures and sells sound systems for both home and audio. All parts of sound systems, with the exception of DVD players, are produced in Rochester, New York, plant. DVD players used in the assembly of Sturdivant's systems are purchased from Morris Electronics of Concord, New Hampshire.
Sturdivant purchasing agent Mary Kim submits a purchase requisition for the DVD players once every four weeks. Company's annual needs total 5,000 units (20 per working day), and cost per unit is $60. (Sturdivant doesn’t purchase in greater quantities as Morris Electronics does not offer quantity discounts.) As Morris promises delivery within one week following receipt of a purchase requisition, rarely is there a shortage of DVD players. (Total time between date of order and date of receipt is 5 days).
Associated with 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. Additionally to procurement costs, Sturdivant incurs inventory carrying costs which include insurance, storage, handling, taxes, and so on. These costs equal $6 per unit per year.
Starting in August of this year, management of Sturdivant Sound Systems would embark on the company-wide cost control program in the attempt to improve its profits. One area to be closely examined for possible cost savings is inventory procurement.
1. Calculate the Optimal Order quantity of DVD players.
2. Find out the appropriate reorder point (in units).
3. Calculate the costs savings which the company would realize if it implements the optimal order inventory procurement decision.
4. Should procurement costs be considered a linear function of the number of orders?