Problem:
A magnet manufacturer purchases copper on the open market at monthly intervals during the year. The best estimate of average price for the next year is $1.10 per lb. A fixed quantity of 25,000 lb per month is needed to meet the expected requirements for a 4-month planning horizon. Inventory carrying cost is 20% per year.
Required:
Question 1) Develop a dollar-averaging budget for future purchases.
Question 2) Suppose, at the time of the purchases, the actual prices per lb for the next 4 months turn out to be $1.32, $1.05, $1.10, and $0.95, respectively. If dollar averaging is used, what quantities should be purchased in each month? Is there any advantage over hand-to-mouth stategy? Solve the problem and show all work.