QUESTION 1: FORECASTING SALES AT MAG PETROLEUM

MAG Petroleum is located within the light industrial area, near Zambian Breweries. The company, which is owned and operated by Angelina, has just completed its third year operation. During this time, Angelina has sought to establish a reputation for the company as a supplier of high quality lubricants. The efforts made by Angelina and her staff have proved successful, and her company has become one of the best and fastest growing locally owned company in Zambia.

Angelina has concluded that in order to plan better for the growth of the company in the future, it is necessary to develop assistance that will enable her to forecast lubricant sales by month for up to one year in advance. Angelina has available data on the total lubricant sales that were realized during the previous three years of operation. These data are provided in Table 1.

Managerial Report

Perform an analysis of the sales data for MAG Petroleum and prepare a report for Angelina by answering the following:

1. A graph of the time series (comment on the data pattern).

2. Calculate the seasonal index (to 3 decimal points) for each month.

3. Forecast sales for January through December of the fourth year (make the forecasts to 3 decimal points).

4. Assume that January sales for the fourth year turned out to be $ 290,000. What was your forecast error? Comment.

5. Recommend when the system that you have developed should be updated to account for new sales data that will occur. Assume you have a computer software package.

QUESTION 2: MAKE-OR-BUY ANALYSIS

Managers at PowerFlex Company are reviewing the economic feasibility of manufacturing a part that it currently purchases from a supplier. Forecasted annual demand for the part is 3200 units. PowerFlex operates 250 days per year.

PowerFlex's financial analysts have established a cost of capital of 14% for the use of funds for investments within the company. In addition, over the past year $600,000 has been the average investment in the company's Inventory. Accounting information shows that a total of $24,000 was spent on taxes and insurance related to the company's inventory. In addition, an estimated $9,000 was lost due to inventory shrinkage, which included damaged goods as well as pilferage. A remaining $15,000 was spent on warehouse overheads, including utility expenses for heating and lighting.

An analysis of the purchasing operation shows that approximately 2 hours are required to process and coordinate an order for the part regardless of the quantity ordered. Purchasing salaries average $28 per hour, including employee benefits. In addition, a detailed analysis of 125 orders showed that $2,375 was spent on telephone, paper and postage directly related to the ordering process.

A 1-week lead time is required to obtain the part from the supplier. An analysis of demand during the lead time shows it is approximately normally distributed with a mean of 64 units and a standard deviation of 10 units. Service level guidelines indicate that one stock out per year is acceptable.

Currently, the company has a contract to purchase the part from a supplier at a cost of $18 per unit. However, over the past few months, the company's production capacity has been expanded. As a result, excess capacity is now available in certain production departments, and the company is considering the alternative of producing the parts itself.

Forecasted utilization of equipment shows that production capacity will be available for the part being considered. The production capacity is available at the rate of 1000 units per month, with up to 5 months of production time available. Management believes that with a 2-week lead time, schedules can be arranged so that the part can be produced whenever needed. The demand during the 2-week time lead time is approximately normally distributed, with a mean of 128 units and a standard deviation of 20 units. Product costs are expected to be $17 per part.

A concern of management is that setup costs will be significant. The total cost of labour and lost production time is estimated to be $50 per hour, and a full-8-hour shift will be needed to set up the equipment for producing the part.

Managerial Report

Develop a report for management of PowerFlex Company that will address the question of whether the company should continue to purchase the part from the supplier or begin to produce the part itself. Your report is developed by answering the following questions:

1. An analysis of the holding costs, including the appropriate annual holding cost rate.

2. An analysis of ordering costs, including the appropriate cost per order from the supplier.

3. An analysis of setup costs for the production operation

4. A development of the inventory policy for the following two alternatives:

a) Ordering a fixed quantity Q from the supplier

b) Ordering a fixed quantity Q from in-plant production

Covering the following elements:

(i) Economic order quantity (EOQ)

(ii) Number of orders or production runs per year.

(iii) Cycle time

(iv) Reorder point

(v) Amount of safety stock

(vi) Expected maximum inventory

(vii) Average inventory.

(viii) Annual holding cost

(ix) Annual ordering cost

(x) Annual cost of the units purchase or manufactured.

(xi) Total annual cost of the purchase policy and the total annual cost of the production policy.

5. Make a recommendation as to whether the company should purchase or manufacture the part. What savings are associated with your recommendation as compared with the other alternative?