CHAPTER 15 INVENTORY MANAGEMENT I Questions The EOQ or economic order point tells us at what size order point we will minimize the overall inventory costs to the firm, with specific attention to inventory ordering costs and inventory carrying costs It does not directly tell us the average size of inventory on hand and we must determine this as a separate calculation It is generally assumed, however, that inventory will be used up at a constant rate over time, going from the order size to zero and then back again Thus, average inventory is half the order size A safety stock protects against the risk of losing sales to competitors due to being out of an item A safety stock will guard against late deliveries due to weather, production delays, equipment breakdowns and many other things that can go wrong between the placement of an order and its delivery With more inventory on hand, the carrying cost of inventory will go up A just-in-time inventory system usually means there will be fewer suppliers, and they will be more closely located to the manufacturer they supply Inventory management is the process of managing the investment in inventory Inventory is classified as raw materials, work-in-process, or finished goods Inventory management is important because it affects the firm’s profitability and errors cannot be quickly corrected The investment in inventory depends on the level of sales, the length of the production cycle, and the durability and style of the product The optimal level of inventory involves a tradeoff between carrying costs and ordering costs Carrying costs are the costs of holding items in inventory for a specific time period Ordering costs are costs of placing and receiving an order The sum of these two costs is the total inventory cost Safety stock is additional inventory carried to meet unexpected demand and unanticipated delays in shipping or production Safety stock provides a buffer or protection against these uncertainties 15-2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations II True or False False False True False True 10 True True True True True 11 12 13 14 15 False False True False True III Practical Problems PROBLEM (a) Substituting S = 12,000, O = P50, and C = P0.10 in the equation below, the economic order quantity is: Q* = Q* =   2SO C (2) (12,000) (P50) P0.10 = 3,464 gallons (b) The average inventory is determined by dividing the economic order quantity, Q*, by as follows: 3,464 Average inventory = = 1,732 gallons (c) Substituting C = P0.10, Q* = 3,464, S = 12,000, and O = P50 in the equation, the total inventory costs for the month is: Total inventory costs = Carrying costs = C Q S O = = = = Total inventory costs = CQ + Ordering costs + SO Q carrying cost per unit for the period quantity ordered in units per order total sales demand or usage in units for the period fixed ordering cost per order (P0.10) (3,464) + = P346 per month (12,000) (P50) 3,464 Inventory Management 15-3 (d) Substituting Q* = 3,464 and average daily demand = 12,000 / 30 days in the equation below, the optimal length of the inventory cycle is: Q* T* = Average daily demand T* 3,464 12,000 / 30 days = = 8.66 days (e) Substituting S = 12,000 and Q* = 3,464 in the equation below, the number of orders per month is: S 12,000 N* = = = 3.5 orders per month Q* 3,464 Substituting time period = 30 and T* = 8.66 in the equation below produces the same result N* time period T* = = 30 8.66 = 3.5 orders per month PROBLEM (a) Substituting S = 36,000, O = P100, and C = P5 in the equation below, the economic order quantity is: Q* = Q* =   2SO C (2) (36,000) (P100) = P5 1,200 fruitcakes (b) Substituting the economic order quantity, Q* = 1,200, and SS = 3,000 in the equation below, the average inventory is: Average inventory = Q* + SS Average inventory = 1,200 + 3,000 = 3,600 fruitcakes (c) Substituting S = 36,000 and Q* = 1,200 in the equation indicates that the Fruitcake Specialists Company will make 30 orders per year or about one order every 12 days (365 days / 30 orders per year = 12.17 days) 15-4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations N* = S Q* = 36,000 1,200 = 30 orders per year (d) Fruitcake Specialists’ total carrying cost is found by multiplying the average inventory, 3,600 tires, by the carrying cost per unit, P5, and then adding the product of the orders per year, 30, multiplied by the ordering costs per order, P100 Total inventory costs = (3,600) (P5) + (30) (P100) = P21,000 (e) Substituting SS = 3,000, S = 36,000, time period = 365, and n = in the equation below indicates that Fruitcake Specialists should reorder when the inventory reaches 3,493 fruitcakes S Qr = SS + x n time period Qr = 3,000 + 36,000 365 x = 3,493 fruitcakes PROBLEM a The turnover rate for food is calculated as follows: Food cost for the month P78,700* = Average food inventory during month P15,250** * Beginning food inventories Add: Purchases during the current month Total Less: Ending food inventories, current month Food cost for the month ** Average food inventory during month = = = b = 5.16 times P18,300 72,600 P90,900 12,200 P78,700 (P18,300 + P12,200) / P30,500 / P15,250 The days inventory was available for the month of March is computed as follows: 365 days 365 days = = 70.73 or 71 days Food inventory turnover 5.16 Inventory Management 15-5 PROBLEM Q* = =   (F) (S) (C) (P) P144,000,000 P100 = =  (P600) (120,000) 0.20 (P500) 1,200 units Maximum inventory = EOQ + Safety stock = 1,200 + 500 = 1,700 units Average inventory = EOQ / + Safety stock = 600 + 500 = 1,100 units .. .15- 2 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations II True or False False False True False True 10 True True True True True 11 12 13 14 15 False False... order every 12 days (365 days / 30 orders per year = 12.17 days) 15- 4 Solutions Manual - Managerial Accounting and Finance for Hospitality Operations N* = S Q* = 36,000 1,200 = 30 orders per year... Management 15- 3 (d) Substituting Q* = 3,464 and average daily demand = 12,000 / 30 days in the equation below, the optimal length of the inventory cycle is: Q* T* = Average daily demand T* 3,464