Question

lpha Appliances, Inc. Alpha Appliances, Inc. is a major distributor of household appliances. Its customer base...

lpha Appliances, Inc.

Alpha Appliances, Inc. is a major distributor of household appliances. Its customer base consists of local retailers who stock a variety of products including appliances. Alpha purchases bulk of its products from China, Mexico, India, and Thailand. The business has been good.

In past few months, Jay Adams, VP-Marketing has received numerous complaints from its customers that they have not been receiving supplies on time, costs have gone up, etc. Jay calls a meeting of his sales manager Kathy Land, production manager Abraham King, and procurement manager Ashley Thompson.

Jay Adams: Good morning ladies and gentlemen! How are you guys!

Kathy, Abraham and Ashley all respond with a smile.

Jay: Lately I have been receiving a lot of complaints from our customers and that worries me.

Ashley: I am not aware of it! What are the complaints about?

Jay: There are complaints such as our product prices have gone up, we are not able to deliver on time, and so on!

Abraham: Are the complaints specific to a product, or across the board?

Jay: Well, I am not sure. We probably have problems with many of our products. The most serious problem however seems to be with our very popular ceiling fan model B23Y5. Ashley, are you aware of any issues either with this product or its supplier?

Ashley: Well, we have buying this product from China with a company named Xanu Enterprises. They have recently raised prices, so we were forced to raise ours, in order to maintain our margins.

Jay: Abraham, do you think we can buy parts and assemble this fan in house? Abraham: Yes, we have the capability to do so.

Jay: Kathy, why do our customers complain about late deliveries? Do not we have a good idea of the future demand?

Kathy: We do forecast as best we can. But, I guess sometimes we screw it up! If we do better job of forecasting, this problem can be minimized.

Jay: Well, we have had good discussion of the situation. I am giving you guys one week of time to do your home work. Ashley, try to identify more reliable vendors; Abraham, estimate the cost if we do in-house production; and Kathy, you come up with a more reliable forecast.

Kathy, Abraham and Ashley all nod their heads and the meeting is adjourned.

AFTER ONE WEEK

The meeting takes place, and the following data is presented.

ASHLEY THOMPSON: We have identified two more reliable vendors with following cost structure.

Xanu Enc. - $33 per fan, lead time fixed - 3 weeks

Weni Inc.- - $34 per fan (if purchase quantity is below 1,000)

$33 per fan (if the purchase quantity is between 1,000 and 2,000) $32 per fan (if the purchase quantity is between 2,000 and 5,000)

$31 per fan, if the purchase quantity is above 5,000 (Lead time for Weni Inc. is fixed, 2 weeks)

Yama Inc. - $32 per fan, lead time variable, it will require a safety stock of 300 fans.

The ordering cost is $400, irrespective of the vendor.

ABRAHAM KING: We can produce this product with following cost and related data.

Cost of production of fan: $32 per fan

Production rate: 400 fans/day

Production Set up cost: $3,000

KATHY LAND: We have examined recent past sales data and recent market trends. We expect daily demand to about 50 fans.

The management estimates inventory costs to be about $5 per year per fan. After accounting for holidays, it is estimated the company is in business for about 250 days in a year.

Answer the following questions. Show all work that you need to arrive at the final answer.

If Alpha did not want to go for in-house production, which of the three vendors it should choose? Why?

If Alpha decides to produce, how many fans should it produce every time?

Should company buy or produce? Justify your answer based on the costs involved.

Round all numbers to numbers to the nearest whole number.

This is a group case assignment. A group cannot have more than two students. Both students must contribute equally. You can form your own group. Only one of the members of the group needs to submit. If you cannot form group and wish to do this assignment alone, you can do so. Remember this case is worth 20% of the course grade.

Homework Answers

Answer #1

Let’s consider the options one by one. We have some common data such as

Annual demand (D) = 50*250 = 12500

Holding cost (H) = 5

Xanu Enc.

They have a fixed lead time. Thus we do not need safety stock. We can use the EOQ model here. In addition to the above data, we also know that their ordering cost (S) is 400 and product cost (P) is $33. Now we know the EOQ is

EOQ = sqrt(2*D*S/H) = sqrt(2*12500*400/5) = 1414.2 or 1414 units (rounding to whole number)

This means that the total cost for Xanu will be

Total cost = Annual purchase cost + Annual holding cost + Annual ordering cost

Total cost = D*P + H*Q/2 + S*D/Q = 12500*33 + 5*1414/2 + 400*12500/1414 = 419571.1 or 419571 (rounded to whole number)

Weni Inc.

They have quantity discount model. The ordering cost is 400 and the price of the fan varies. Thus we need to calculate the EOQ first then consider the total cost.

From the previous part (Xanu) we already know the EOQ.

This is in the second bracket. This means we need to consider the edges of the price ranges quantity that slopes towards the EOQ. This means we need to find the total cost at 999 units, 1414 units, 2000 units, and 5000 units. We will use the same formula for total cost but change the value of Q 4 times

Total Cost (at Q=1000) = 12500*34 + 5*999/2 + 400*12500/999 = 432502.5

Total cost (at Q = 1414) = 419571

Total cost (at Q = 2000) = 12500*32 + 5*2000/2 + 400*12500/2000 = 407500

Total cost (at Q = 5000) = 12500*31 + 5*5000/2 + 400*12500/5000 = 401000

Best option with Weni Inc is to order 5000 units at one go with a total annual cost of 401000

Yama Inc.

Since we will be maintaining a safety stock of 300 we will continuously have this quantity in the inventory.

EOQ = 1414 units

The total cost will be slightly different as we will need to consider an additional cost for the safety stock. Thus it will be

Total cost (at Q = 5000) = 12500*32 + 5*(1414/2+300) + 400*12500/1414 = 408571

So among the vendors, the best option is Weni Inc. with an order of 5000 units every time.

In-house

Now let’s calculate the cost of in house production. For this we need to use some additional information and use the EPQ (economic production quantity) model

We have

Daily demand (d) = 50

Production/day (p) = 400

Set up cost (S) = 3000

EPQ is given by the formula

EPQ = sqrt(2*D*S/H)*sqrt(p/(p-d))

EPQ = sqrt(2*12500*3000/5)*sqrt(400/(400-50)) = 4140.39 or 4140 units (rounding to whole number)

Total cost will be

Total cost = P*D + (Q/2)*(p-d)/p + S*D/Q

Total cost = 32*12500 + (4140/2)*(400-50)/400 + 3000*12500/4140 = 410869.2 or 410869

Now that we have all the values, we can answer the questions

If Alpha did not want to for in-house production, they should choose Weni Inc due to the lowest total cost incurred of $401,000

If Alpha decides to produce it should produce 4140 units of fan every production run

The company should buy and buy from Weni Inc. Because the overall annual cost is lesser than producing in-house.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
A few months ago you were hired to be quality manager of Papyrus, Inc., a company...
A few months ago you were hired to be quality manager of Papyrus, Inc., a company making paper board and converting most of this board into a variety of products. While you have had prior experience in the chemical process industry and in quality, this is your first job in the paper industry. With the help of the company controller, you have analyzed the various costs of quality, which run as follows:                                                                                           Annual Loss Dimensional rejections, product line A                            $ 816,000...
A few months ago you were hired to be quality manager of Papyrus, Inc., a company...
A few months ago you were hired to be quality manager of Papyrus, Inc., a company making paper board and converting most of this board into a variety of products. While you have had prior experience in the chemical process industry and in quality, this is your first job in the paper industry. With the help of the company controller, you have analyzed the various costs of quality, which run as follows:                                                                                           Annual Loss Dimensional rejections, product line A                            $ 816,000...
Mr. Bestall, CFO of the Best Finance Inc., was satisfied with its income statement report. He...
Mr. Bestall, CFO of the Best Finance Inc., was satisfied with its income statement report. He decided to have a meeting with the analysts following the Best Finance Inc. before filing its financial statements with the SEC. The following conversation was in the meeting. CFO: The year ended on September 30 should be our most profitable in history and as a consequence, the board of directors has just awarded the officers generous bonuses. Analysts: I thought profits were down this...
Internal and External Linkages, Strategic Cost Management Maxwell Company produces a variety of kitchen appliances, including...
Internal and External Linkages, Strategic Cost Management Maxwell Company produces a variety of kitchen appliances, including cooking ranges and dishwashers. Over the past several years, competition has intensified. In order to maintain—and perhaps increase—its market share, Maxwell’s management decided that the overall quality of its products had to be increased. Furthermore, costs needed to be reduced so that the selling prices of its products could be reduced. After some investigation, Maxwell concluded that many of its problems could be traced...
1. Read the following instructions on 'How to Repair an Electric Fan' which are written in...
1. Read the following instructions on 'How to Repair an Electric Fan' which are written in three different parts before answering the question given. The instructions below are considered ineffective as they are not following the effective instructions strategy. 1 Turn your fan on to make sure that the motor works. Plug your fan in and turn it on to the highest power setting. If the fan blades move a little or it starts to turn, the motor is probably...
Brian Durkee/ Director of Operations, Numi Organic Tea: Well Numi; Numi’s is a triple bottom line...
Brian Durkee/ Director of Operations, Numi Organic Tea: Well Numi; Numi’s is a triple bottom line company which means our focuses are on people, planet and profit. Hi, I’m Brian Durkee. I’m the director of operations for Numi Organic Tea and a big part of my role at Numi is to really manage that, and uh; it’s beyond just taking care of your employees. Numi has fifty employees in the U.S. but the peoples who dedicate the majority of their...
Chemalite, Inc. (B) Cash Flow Analysis Bennett Alexander, a chemical engineer, founded Chemalite, Inc. in late...
Chemalite, Inc. (B) Cash Flow Analysis Bennett Alexander, a chemical engineer, founded Chemalite, Inc. in late 2002. The company was set up to manufacture and sell his latest patented invention, the Chemalite. The first year of operations was successful, allowing Chemalite's directors to declare a $10,000 dividend at the end of 2004. Exhibit 1 presents the income statement and balance sheet for the year ended December 31, 2004. During the meeting with the company shareholders, held in January 2005, Alexander...
Case Study 7-2 FIVE STAR TOOLS Five star tools is a small family -owned firm that...
Case Study 7-2 FIVE STAR TOOLS Five star tools is a small family -owned firm that manufactures diamond -coated cutting tools( chisels and saws) used by jewelers. Production involves three major processes. First, steel “ blanks” (tools without the diamond coating) are cut to size. Second, the blanks are sent to a chemical bath that prepares the tools for the coating process. In the third major process, the blanks are coated with diamond chips in a proprietary process that simultaneously...
Consumerization of Technology at IFG3 “There’s good news and bad news,” Josh Novak reported to the...
Consumerization of Technology at IFG3 “There’s good news and bad news,” Josh Novak reported to the assembled IT management team at their monthly status meeting. “The good news is that our social media traffic is up 3000% in the past two years. Our new interactive website, Facebook presence, and our U-Tube and couponing promotions have been highly successful in driving awareness of our ‘Nature’s Glow’ brand and are very popular with our target demographic—the under-30s. Unfortunately, the bad news is...
INTRODUCTION TO AUDITING ALCHEMY Auditing Alchemy (AA) is a privately-held manufacturing company established in 1998. AA...
INTRODUCTION TO AUDITING ALCHEMY Auditing Alchemy (AA) is a privately-held manufacturing company established in 1998. AA manufactures spheres that are used in a variety of industrial applications. AA is the top sphere producer in the industry and also sells spheres to the U.S. government and other aerospace contracts. The spheres are sold in two forms: green and gold. A third form of sphere, red, is also a by-product of the manufacturing process. Although it is not publicly traded, AA has...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT