The International Production Limited (IPL) is developing ordering policies for its materials that it stocks for resale to its customers. The materials have been classified into three classes:

Class of material

Description of material class

A (Example: TS500) Materials that are of high cost, high volume, or otherwise of critical importance to customers. While these materials represent only about 20 percent of the number of materials, they represent about 80 percent of material value.

B Materials that of moderate cost, moderate volume, or otherwise moderately important to customers. These materials represent about 30 percent of the number of materials and about 15 percent of material value.

C (Example: S80) Materials that are of low cost, low volume, or otherwise of low importance to customers. They can usually be obtained on short notice or other materials can be substituted. They represent about 50 percent of the number of materials and only about 5 percent of material value.

1. The TS500 costs $$199.60; IPL is forecasting that 10,000 of the parts will be needed annually; IPL estimates a 40 percent carrying cost for its inventory per year; it costs approximately $800 to process, receive, and inspect an order for these parts; IPL uses a fixed order quantity inventory system for Class A materials. How many of the parts should be ordered when the material is replenished?

2. The supplier of the TS500 has offered to ship the part at a rate of 100 per day during shipping periods via the suppliers own truck and IPLs plant works 300 days per year. If all other data in (1) above remain the same:

3. How many parts should be ordered when the TS500 is replenished?

4. What annual savings will come to IPL if the new shipping policy is enacted?

5. The supplier of the TS500 has agreed to give IPL a quantity discount. The cost to IPL will be:

Parts ordered per order

Cost per part

1,999

$199.60

1,000

4,999

$198.80

5,000 +

$198.40

If all other data in (1) above remain the same:

1. How many parts should be ordered when the TS500 is replenished?

2. What annual savings will come to IPL because of quantity discounts?

3. The supplier of the TS500 has offered to combine its offer of gradual supply during shipping periods of (2) above and the quantity discount offer of (3). How many parts should be ordered when the material is replenished if all other data remain the same as in (2) and (3)?