Chapter 14-Wagner Fabricating Company-Quantitative Methods for Business

Case Problem 1: Wagner Fabricating Company

1. Holding Cost Cost of capital 14.0% Taxes/Insurance (24,000/600,000) 4.0% Shrinkage (9,000/600,000) 1.5% Warehouse overhead (15,000/600,000) 2.5% Annual rate 22.0%

2. Ordering Cost 2 hours at $28.00 $56.00 Other expenses (2,375/125) 19.00 Cost per order $75.00

3. Set-up Cost 8 Hours at $50.00 $400 per set-up

4. & 5. a. Order from Supplier - EOQ model

Ch = IC = 0.22 ($18.00) = $3.96

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Number of orders = D/Q = 9.19/year

Cycle time = 250(Q) / D = 250(348.16) / 3200 = 27.2 days

Reorder Point:

P(Stockout) = 1 / 9.19 = 0.1088

r = 64 + 1.24(10) = 76.4

Safety stock = 76.4 - 64 = 12.4 Maximum inventory = Q + 12.4 = 360.56 Average inventory = Q/2 + 12.4 = 186.48 Annual holding cost = 186.48(3.96) = $738.46 Annual ordering cost = 9.19(75) = $689.35 Purchase cost = 3200($18) = $57,600 Total annual cost = $59,027.81

b. Manufacture - Production lot size model

Ch = IC = 0.22($17.00) = $3.74 P = 1000(12) = 12,000/year

Note: The five-month capacity of 5,000 units is sufficient to handle annual demand of 3,200 units.

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Number of production runs = D/Q = 3.31/year

Cycle Time = 250(Q) / D = 250(966.13) / 3200 = 75.48 days

Reorder point:

P(Stockout) = 1 / 3.31 = 0.3021

r = 128 + 0.52(20) = 138.4

Safety stock = 138.4 - 128 = 10.4 Maximum inventory = (1 - 3200/12000)966.13 + 10.4 = 718.89 Annual holding cost = (354.25 + 10.4)(3.74) = $1363.79 Annual set up cost = 3.31(400) = $1363.79 Manufacturing cost = 3200($17) = $54,400 Total Annual Cost = $57,088.67

6. Recommend manufacturing the part

Savings: $59,027.81 - 57,088.67 = $1,939.14 (3.3%)

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