Sturdivant Sound Systems manufactures and sells sound systems for both home and audio. All parts of the sound systems, with the exception of DVD players, are produced in the Rochester, New York, plant. DVD players used in the assembly of Sturdivant's systems are purchased from Morris Electronics of Concord, New Hampshire.
Sturdivant purchasing agent Mary Kim submits a purchase requisition for the DVD players 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 does not offer quantity discounts.) Because Morris promises delivery within one week following receipt of a purchase requisition, rarely is there a shortage of DVD players. (Total time between date of order and date of receipt is 5 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 incurs inventory carrying costs that include insurance, storage, handling, taxes, and so forth. These costs equal $6 per unit per year.
Beginning in August of this year, management of Sturdivant Sound Systems will embark on a company-wide cost control program in an attempt to improve its profits. One area to be closely scrutinized for possible cost savings is inventory procurement.
1. Compute the Optimal Order quantity of DVD players.
2. Determine the appropriate reorder point (in units).
3. Compute the costs savings that the company will realize if it implements the optimal order inventory procurement decision.
4. Should procurement costs be considered a linear function of the number of orders?