Question

Lean Principles

Bright Night, Inc., manufactures light bulbs. Its purchasing policy requires that the purchasing agents place each quarter’s purchasing requirements out for bid. This is because the Purchasing Department is evaluated solely by its ability to get the lowest purchase prices. The lowest bidder receives the order for the next quarter (90 working days).

To make its bulb products, Bright Night requires 36,000 pounds of glass per quarter. Bright Night received two glass bids for the third quarter, as follows:

• Central Glass Company: $30.00 per pound of glass. Delivery schedule: 36,000 (400 lbs. × 90 days) pounds at the beginning of July to last for 3 months.
• Ithaca Glass Company: $30.20 per pound of glass. Delivery schedule: 400 pounds per working day (90 days in the quarter).

Bright Night accepted Central Glass Company’s bid because it was the low-cost bid.

Required:

Considering only inventory financing costs, what is the additional cost per pound of Central Glass Company’s bid if the annual cost of money is 8%? (Hint: Determine the average value of glass inventory held for the quarter and multiply by the quarterly interest charge, then divide by the number of pounds.) Round to the nearest cent.

Answer 1

Ans: $0.3per pound

Explanation:

Cost per pound = $30

Annual Cost of Money = 8%

Quarterly Cost of Money = 2%

Material Received at beginning of quarter = 36,000 pounds

Average Inventory Held for the Quarter = Material Received for the quarter / 2

= 36000 / 2 i.e, 18000 pounds

Average value of Inventory for the quarter = Average Inventory * Cost per pound

= 18000 * $30

= $540,000

Additional Cost per pound = (Average Value of Inventory * Quarterly cost of money) / Number of pound

= ($540,000 * 2%) / 36,000

= $0.3per pound

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