Question

The May-Bee Company distributes firefighting equipment. Approximately 50 percent of the company’s SKU are imported and the rest are acquired from domestic suppliers. Typically domestic orders have about 3 SKUs each and imported orders have about 5 SKUs each. May-Bee sales have been increasing at a steady rate and future trends appear very optimistic.

The company relies on the bank for working capital. The owner, Mr. Brown, is experiencing some resistance from his banker in getting more cash to increase his investment in inventories to meet an anticipated increase in sales.

Last year May Bee’s average inventory was around $1,000,000. He paid $52,000 interest on his bank loan, $80,000 rent for his warehouse, and $15,000 to insurance companies. Brown believes it would be profitable to increase his bank loan because he feels he could probably earn 15 percent on the borrowed money.

The following table gives a summary of the costs involved in placing an order. These estimates were supplied by the persons involved, who guessed at the amount of time involved in each activity.

		Time per order (minutes)
Hourly Person involved	Rate ($)	Domestic	Imported
Typist	20.00	20	40
Inventory clerk	30.00	20	30
Receiver	12.00	30	60
Bookkeeper	15.00	20	20
Mr. Brown	20.00	20	60

In addition, there was a charge of $30 per order, which represented the bank charge for the letter of credit for imported items, whereas the bank charges were only $5 per order for items acquired from domestic suppliers.

This cost description was compiled by the bookkeeper. In your opinion, are there any costs that have been left out? Comment briefly.

Compute May-Bee’s carrying cost (h)

Compute the cost of placing an order for a single domestic and for a single imported SKU

Answer 1

Answer:

a)

Interest on bank loan for every single SKU, rent for every single SKU, insurance cost for every single SKU are the costs that have been left. This cost is same for the both imports and exports.

B.

To get the minutes order multiply the minutes to the order value per hour. Divide the cost for every order by 3 for domestic orders and divide the cost for every order by 5 for imported orders because every dometic order has 3 units and every imported order has 5 units.

We can get the cost per unit for a domestic item, and the cost per unit for an imported item. Multiply each by 500000 and add the two, since 50 % of the items are imported and 50% of the items are domestic. You will get the carrying cost for Maybee as shown below

C.

From the carrying cost per unit

Imported SKU = $19.21

domestic SKU =$13.26