Question: Sturdivant Sound Systems

Sturdivant Sound Systems manufactures and sells stereo and CD sound systems in both console and component styles. All parts of the sound systems, with the exception of speakers, are produced in the Rochester, New York, plant. Speakers used in the assembly of Sturdivant's systems are purchased from Morris Electronics of Concord, New Hampshire. Jason Pierce, purchasing agent for Sturdivant Sound Systems, submits a purchase requisition for the speakers once every four weeks. The company's annual requirements total 5,000 units (20 per working day), and the cost per unit is $60. (Sturdivant does not purchase in greater quantities because Morris Electronics, the supplier, does not offer quantity discounts.) Rarely does a shortage of speakers occur because Morris promises delivery within 1 week following receipt of a purchase requisition. (Total time between date of order and date of receipt is 10 days.) Associated with the 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. In addition to procurement costs, Sturdivant Sound Systems incurs inventory carrying costs, which include costs of insurance, storage, handling, taxes, and so on. These costs equal $6 per unit per year. Beginning in August of this year, management of Sturdivant Sound Systems will embark on a companywide cost control program in an attempt to improve its profits. One of the areas to be scrutinized closely for possible cost savings is inventory procurement.

Discussion Questions

1. Compute the optimal order quantity.

2. Determine the appropriate ROP (in units).

3. Compute the cost savings that the company will realize if it implements the optimal inventory procurement decision.

4. Should procurement costs be considered a linear function of the number of orders?