accounting

Question #1

A firm expects to sell 50,000 units of its product annually. It estimates that it costs $2,000 to place an order and that each unit costs $8.00 annually to carry in inventory. It takes 4 days to receive an order once it is placed. Assume that the store is open every day of the year.

a) How many units should the firm order at a time if it wants to minimize the sum of ordering and carrying costs?

EOQ = 5,000 units

b) How many orders will it place in a year?

10 orders (50,000 / 5,000)

c) How much will total ordering costs be for the year?

10 x $2,000 = $20,000 in ordering costs

d) What will its average inventory level (in units) be during the year?

Average inventory = EOQ / 2 = 2,500 units

e) How much will total carrying costs be for the year?

2,500 x $8 per unit = $20,000 in carrying costs

f) What is its reorder point?

Daily sales = 137 units (50,000 /365); reorder point = 548 units (137 x 4 days)

g) What would you expect to happen to the reorder point if uncertainty is taken into consideration?

The reorder point would be higher if uncertainty is taken into consideration. The new reorder point would be the desired safety stock units plus 548.

Question #2

If a firm is considering implementing a JIT inventory system, list and describe the accounting issues that the firm should consider when making this decision.

It will be necessary to track information (metrics) to help see if JIT is feasible and if it is being successful. Specifically, the firm should track information on internal performance and supplier reliability. Examples include:

Examples to measure internal performance include:

· On-time delivery %

· Cycle time

· Defect rates or % yield

· Unscheduled downtime

· Sales increase from JIT implementation

· Customer satisfaction

· # of rush shipments required

Examples to measure supplier reliability include:

· % of supplier shipments without defects / errors

· Cost of ownership

· % of supplier shipments on time

There are other possibilities