Solution manual managerial accounting and finance for hospitality OperationsCHAPTER 15

The EOQ or economic order point tells us at what size order point we will minimize the overall inventory costs to the firm, with specific attention to inventory ordering costs and invent

INVENTORY MANAGEMENT

I Questions

1 The EOQ or economic order point tells us at what size order point we will minimize the overall inventory costs to the firm, with specific attention to inventory ordering costs and inventory carrying costs It does not directly tell us the average size of inventory on hand and we must determine this as a separate calculation It is generally assumed, however, that inventory will be used up at a constant rate over time, going from the order size to zero and then back again Thus, average inventory is half the order size

2 A safety stock protects against the risk of losing sales to competitors due to being out of an item A safety stock will guard against late deliveries due to weather, production delays, equipment breakdowns and many other things that can go wrong between the placement of an order and its delivery With more inventory on hand, the carrying cost of inventory will go up

3 A just-in-time inventory system usually means there will be fewer suppliers, and they will be more closely located to the manufacturer they supply

4 Inventory management is the process of managing the investment in inventory Inventory is classified as raw materials, work-in-process, or finished goods

5 Inventory management is important because it affects the firm’s profitability and errors cannot be quickly corrected

6 The investment in inventory depends on the level of sales, the length of the production cycle, and the durability and style of the product

7 The optimal level of inventory involves a tradeoff between carrying costs and ordering costs Carrying costs are the costs of holding items in inventory for a specific time period Ordering costs are costs of placing and receiving an order The sum of these two costs is the total inventory cost

8 Safety stock is additional inventory carried to meet unexpected demand and unanticipated delays in shipping or production Safety stock provides a buffer or protection against these uncertainties

II True or False

III Practical Problems

PROBLEM 1

(a) Substituting S = 12,000, O = P50, and C = P0.10 in the equation below, the economic order quantity is:

(b) The average inventory is determined by dividing the economic order quantity, Q*, by 2 as follows:

(c) Substituting C = P0.10, Q* = 3,464, S = 12,000, and O = P50 in the equation, the total inventory costs for the month is:

Total inventory costs = Carrying costs + Ordering costs

C = carrying cost per unit for the period

Q = quantity ordered in units per order

S = total sales demand or usage in units for the period

O = fixed ordering cost per order

= P346 per month



Q* = (2) (12,000) (P50)P0.10 = 3,464 gallons

3,464 2

CQ 2

SO Q

(P0.10) (3,464) 2

(12,000) (P50) 3,464

(d) Substituting Q* = 3,464 and average daily demand = 12,000 / 30 days in the equation below, the optimal length of the inventory cycle is:

(e) Substituting S = 12,000 and Q* = 3,464 in the equation below, the number of orders per month is:

Substituting time period = 30 and T* = 8.66 in the equation below produces the same result

PROBLEM 2

(a) Substituting S = 36,000, O = P100, and C = P5 in the equation below, the economic order quantity is:

(b) Substituting the economic order quantity, Q* = 1,200, and SS = 3,000 in the equation below, the average inventory is:

(c) Substituting S = 36,000 and Q* = 1,200 in the equation indicates that the Fruitcake Specialists Company will make 30 orders per year or about one order every 12 days (365 days / 30 orders per year = 12.17 days)

3,464 12,000 / 30 days

S Q*

12,000 3,464

time period T*

30 8.66



Q* =  (2) (36,000) (P100)P5 = 1,200 fruitcakes

1,200 2

Q*

Average daily demand

Q*

2

N* = = = 30 orders per year

(d) Fruitcake Specialists’ total carrying cost is found by multiplying the average inventory, 3,600 tires, by the carrying cost per unit, P5, and then adding the product of the orders per year, 30, multiplied by the ordering costs per order, P100

Total inventory costs = (3,600) (P5) + (30) (P100) = P21,000

(e) Substituting SS = 3,000, S = 36,000, time period = 365, and n = 5 in the equation below indicates that Fruitcake Specialists should reorder when the inventory reaches 3,493 fruitcakes

Qr = 3,000 + x 5 = 3,493 fruitcakes

PROBLEM 3

a The turnover rate for food is calculated as follows:

Add: Purchases during the current month 72,600

Less: Ending food inventories, current month 12,200

** Average food inventory during month = (P18,300 + P12,200) / 2

= P30,500 / 2

= P15,250

b The days inventory was available for the month of March is computed as follows:

S Q*

36,000 1,200

36,000 365

Food cost for the month Average food inventory during month

P78,700*

P15,250**

365 days Food inventory turnover

365 days 5.16 S time period

PROBLEM 4

1

2 Maximum inventory = EOQ + Safety stock = 1,200 + 500 = 1,700 units

3 Average inventory = EOQ / 2 + Safety stock = 600 + 500 = 1,100 units

0.20 (P500)

=

P144,000,000 P100