Question :
Buffalo Falls Ltd manufactures among other things, glass table tops. It uses a just-in-time system of production for its table tops. Thus it orders the glass used in production in bulk. The glass takes up a lot of space in the company's warehouse, and often is damaged through storage. Accordingly Buffalo Falls has decided to trial a Just-in-Time (JIT) purchasing system. The subsequent data relate to this system.
- Demand for table tops is estimated to be 9,000 units for the coming year.
- Presently, each table top needs on average ½ a sheet of glass. This adds an amount for reworks and scrap. Under the JIT system, reworks and scrap are expected to be minimal; thus only 1/3 a sheet of glass is expected to be used per table top.
- Each sheet of glass presently costs $60. This will not change under JIT.
- Presently Buffalo Falls orders glass in lots of 1,000 sheets. With the introduction of JIT this may fall to 50 sheets.
- Every order costs $100, but will fall by 50% under JIT.
- Damaged inventory is evaluated to be on average $5 per average unit held. This can't be incurred under JIT.
- Other carrying costs amount to $60 per unit. This can't change if JIT is introduced.
- Buffalo Falls can't need as much warehouse space, thus will lease 75% of an existing warehouse to another firm for $2 per square meter. The warehouse has 30,000 square meters.
- Three employees who presently earn $30,000 each will be directly affected by the just-in-time adoption decision. Two can be transferred to other positions within Buffalo Falls; one will be fired.
- Buffalo Falls expects that it can lose sales amounting to 250 table tops with the introduction of JIT. Selling price of these items will be $200 per item, and variable costs per item can be $60 and fixed costs will be $20 per item.
- Consider Buffalo Falls has a required rate of return of 30% per annum.
Required:
a) Evaluate the Economic Order Quantity for glass.
b) Determine total annual cost of ordering and carrying the glass.