Pinan arnt il 3. Calculate the reorder point. : 20-22 Economic order quantity, effect of parameter changes (continuation of 20-21). Sportsman Textiles (ST) manufactures the Galaxy jerseys that Wonder Line (WAL) sells to its customers. ST has recently installed computer software that enables its customers to conduct “one-stop” purchasing using state-of- the-art Web site technology. WI's ordering cost per purchase order willbe S40 using this new technology. 1. Calculate the £00 for the Galaxy jerseys using the revised ordering cost of $40 Per purchase order. Qssume all other data from Exercise 20-21 are the same. Comment onthe result. 2 Suppose ST proposes to “assist” WL. ST will allow WL customers to wer directly from the ST Web site. ST would ship directly to these customers. ST would pay $12 to WL for every Galaxy jersey purchased by one of WL’s customers. Comment qualitatively on how this offer would affect inventory management at WL What factors should WL consider in deciding whether to aecept ST's proposal? 20-23 E00 fora retailer. The Fabric World sells fabrics to a wide range of industrial and consumer us- ers. One of the products it carries is denim clot, used in the manufacture of jeens end carrying bags. The fupplie forthe denim cloth pays all incoming freight. No incoming inspection of the denin fe necessary because the supplier has a track record of delivering high-quality merchandise. The purchasing officer of the Fabric World has collected the following information: Annual demand for denim cloth 40,700 yards Ordering cost per purchase order $185 Carrying cost per year 10% of purchase costs Safety-stock requirements None Cost of denim cloth S11 per yard The peas lead time is 2 weeks. The Fabric World is open 220 days a year (44 weeks for 5 days a week). 1. Calculate the E00 for denim cloth. 2 Calculate the number of orders that will be placed each year, 3. Calculate the reorder point for denim cloth, 20-24 £00 for manufacturer. $k8 Company produces skateboards and purchases 20,000 units of a wheel bearing each year at a cost of $1 per unit. Sk8 requires a 15% annual rate of return on investment. In addi- tion, the relevant carrying cost (for insurance, materials handling, breakage, etc) is $0.17 per unit per year, The relevant ordering cost per purchase order is $38.40. 1, Calculate Sk8's EOQ for the wheel bearing. 2 Calculate Sk8's annual relevant ordering costs for the EOQ calculated in requirement 1. 3. Calculate Ské's annual relevant carrying costs for the EOQ calculated in requirement 1. 4. Assume that demand is uniform throughout the year and known with certainty so there is no need for safety stacks. The purchase-order lead time is half a month. Calculate Sk8's reorder point for the wheel ring. 20-25 Sensitivity of EO to changes in relevant ordering and carrying costs, cost of prediction error. Alpha Company's annual demand for its only product, XT-590, is 10,000 units. Alpha is currently analyzing Possible combinations of relevant carrying cost per unit per year and relevant ordering cost per purchase order, depending on the company's choice of supplier and average levels of inventory. This table presents three possible combinations of carrying and ordering costs, Relevant Carrying Cost per Unit per Year _ Relevant Ordering Cost per Purchase Order $10 ‘$400, $20 $200 sao $100 fa) EOQ and {b) annual 1. For each of the relevant ordering and carrying-cost alternatives, determi relevant total costs. . ; ; 2 How does your answer to requirement 1 give insight into the impact of changes in relevant ordering and carrying costs on E0Q and annual relevant total costs? Explain briefly, Scanned with CamScanneree ae s2 ‘Agha ‘ould have incurred if it had correctly estimated the urchase order of "0 and the relevant ordering cost per Pi oa vement 1. calculate and comment on the cost of the be $400. Calculate the actual annual rel to the annual relevant total costs thet relevant carrying cost per unit per year $200 that you have already calculated in requir prediction error: 20-26 sIT production, relevant benefits, relevant costs, Te Spartanburg plant. The Knot is considering implementing 8 2) estimated costs and benefits of JIT production: : Sa ey WB ee arctan i current level of $1,000,000. ‘adiing, and setup costs, which currently total ‘$400,000 annually, would wuld reduce rework costs by 25%. The Knot cur- Knot manufactures men’s neckwear at its production system. The following are the b. Average inventory would dec . Insurance, space, materials: decline by 20%. ; y 4. The emphasis on quality inherent in JIT production wot rently incurs $160,000 in annual rework costs. j - 8. Improved product quality under JIT production would enable The Knot to raise the pri by $2per unit. The Knot sells 100,000 units each year. The Knot’s required rate of return on inventory investment is 15% per year. 4. Calculate the net benefit or cost to The Knot f it adopts JIT production at the Spartanburg plant. 2 Whatnonfinancial and qualitative factors should The Knot consider when making the decision to adopt of its product IT production? : 3. Suppose The Knot implements JIT production at its Spartanburg plant. Give examples of performance measures The Knot could use to evaluate and control JIT production. What would be the benefit of The Knotimplementing an enterprise resource planning (ERP) system? 20-27 Backflush costing and JIT production, Grand Devices Corporation acsombles handheld comput- */ st that have scaled-down capabilities of laptop computers. Each handheld computer takes 6 hours to assemble, Grand Devices uses a JIT production system and a backflush costing system with three trigger points: = Purchase of direct materials = Completion of good finished units of product = Sale of finished goods There are no beginning inventories of materials or finished goods and no beginning or ending work-in- process inventories. The following data are for August 2017; Direct materials purchased $2,958,000 Conversion costs incurred $777,600 Direct materials used $237,600 Conversion costs allocated $806,400 Grand Devices records direct materials purchased and conversio i E ; Nn costs incurred at actu: Pa Co sis esaice aa finished goods are sold, the backflush costing system ou rough irect materials cost ($102 per unit) and standard conversion cost (S2 it it Produced 28,800 finished units in August 2017 and sold 28,400 unit rieteuats eatin 3,400 units. The i it in August 2017 was $102, and the actual conversion cost per unit mesa See 1. Prepare summary journal entrie it isposing roves amnesty ies for August 2017 (without disposing of under- or overallocated conver- 2 Post ies in requis the entries in requirement 1 to T-accounts for applicable Materials and In-Process Inventory Control, Finished Good: fc pale 's Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of 3. Under an ideal JIT production s in requirement 1? 'ystem, how would the amounts in your journal entries differ fram those ‘materials purchase and sale {continuation of 20-27), 20.21, exceptthat Grand Devices now uses a backfush costing sys- ts for making entries in the accounting system: Assume the same facts as in Exercise ab 20-28 Backflush costing, two tri ‘tem with the following two trigger point Purchase of direct materials * Sale of finished goods Scanned with CamScanner2 Tre Inventory Control account wil include direct materials purcheses bt natytin production, materials wark i process, and matrsin finshed goods but nt sod. No conversion costs ar invetoried. Any under or overaliocted conversion casts are writen off monthly to Coste Geads Sout i 1, Prepare surmmary journal entries for August, i isposit gust, inelud . team Prepare sun aust, including the disposition of under or wrerinnstedi can, 2 Postthe entries inrequrement to T-accounts for Inventory Control, Conversion Costs Control, Conwer- sion Costs Allocated, and Cost of Goods Sod. 20-29 Backflush costing two trigger points, completion of production and sale (continuation of 20-27). Assume the same facts as in Exercise 20-27, except now Grand Devices uses only two trigger points for ‘making entries in the accounting system: = Completion of good finished units of product Sole of finished goods ‘The inventory account is confined solely to finished goods. Any under- or overallocated conversion costs ‘are written off monthly to Cost of Goods Sold. 1. Prepare summary journal entries for August, including the disposition of under- or overallocated con- version costs. 2 Post the entries in requirement 1 to T-accounts fr Finished Goods Control, Conversion Costs Control, Conversion Costs Allocated, and Cost of Goods Sold. Problems 20-30 £00, uncertainty, safety stock, reorder point. Chadwick Shoe Co. produces and sells an excellent-quality walking shoe. After production, the shoes are distributed to 20 warehouses sround the country. Each warehouse services approximately 100 stores in its region. Chadwick uses an £0 model to determine the number of pairs of shoes to order for each warehouse from the factory. Annual demand for ‘Warehouse ORZ is approximately 120,000 pairs of shoes. The ordering cost is $250 per order. The annual carrying cost of e pair of shoes is $2.40 per pair. 1. Use the E00 model to determine the optimal number of pars of shoes per order. 2 Assume each month consists of approximately 4 weeks. If ittakes 1 week to receive an order, at what point should warehouse OR2 reorder shoes? 3. Although ORZ’s average weekly demand is 2500 pairs of shoes (120,000 + 12 months + 4weeks), de- mand each week may vary withthe following probability distribution: Total demand for1week —_2000pairs 2.250 pairs 2500pairs 2750pairs 3,000 peirs Probability (sums to 1.00) 0.08 020 052 020 008 {fa store wants shoes and OR2 has none in stock, OR2 can “rush” them to the store at an additional cost of 52 pe pez How much safety stock should Warehouse ORZ hold? How wil tis sffect the reorder point and reorder quantity? 20-31 £00, uncertainty, safety stock, reorder point. Philips Corporation isa major menufacturer of food processors. tt purchases motors from Viking Corporation, Annus! demand is $2000 ators per year or 1,000 rotors per week The ordering cost is $360 per order. The annual carrying cost is $8.50 per motor. It cur rently takes Zweeks to supply an order to the assembly plant. 4. Whatis the optimal number of motors that Phlips's managers should order according tothe EOQ model? 2. At what point should managers reorder the motors, assuming tht both demand and purchase-order ead time are known with certainty? 3. Now assume that demand can vary during the 2-week purcha: shows the probability distribution of various demand levels: der lead time. The following table otal Demand for Motors for2Weeks Probability of Demand (sums to 1) 1,800) 005 119800 020 2,000 050 2200 020 2400 005 Id have to rush order the motors at an eddtional cost of $5,ner.mo- illg wut of stock, it woul I Phitips runs 0 told? How wil this alae se reser point and tor. How much safety stack should the assembly pla reorder quantity? 20-32 MRP, E00, and JIT.Toch Works Corr ‘of songs. Tech Works forecasts that demans produces J-Pods, music layers that can downlsadthoesands in 2017 will bo 48000 J-Pods. The variable production cost of Scanned with CamScannerWw oe tug. What tup. : 4 per re tne models analyzed i thE — = it del, Rugged Outfitters purchases one model ation criteria on E00 model. Rug} one ode 20-33 Effect of na 9520 per unit and resells it to end consumers. In rar at at ist (000 units. Ordering costs are $500 per order and carrying ct 4 skate : te paauerianion ‘$40 in the opportunity cost of holding inventory. i f ir rantity using the E00 model. 1 amt ei fraser Yorn] he annul elvan or vi at i any excludes the opportunity cost of carrying yaluating the manager, the company ‘ st of * Assume anager makes he 00 decision excluding the opportunity cost of carrying inventory, the relevant carrying cost would be $60, not$100. How would this affect the EOQ amount and the actual 1 relevant cost of ordering and carrying inventory? r ue 4 Wat is the cost impact on the company of excluding the opportunity cost of carrying inventory when * raking £00 decisions? Why do you think the company currently excludes the opportunity costs of car- tying inventory when evaluating the manager's performance? What could the company do to encour- age the manager to make decisions more congruent with the goal of reducing total inventory costs? 20-34 JIT purchasing, relevant benefits, relevant costs. (CMA, adapted) The Gibson Corporation is 2 manufacturing company that uses automatic stamping machines to manufacture garage doors from rolled sheets of raw steel. Gibson's inventory of raw steel averages $600,000. Juan Sanchez, president of Gibson, and Jane Anderson, Gibson's controller, are concerned about the costs of carrying inventory. The steel supplier is wiling to supply steel in smaller lots at no additional charge. Anderson identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory: isthe annual costo’ FT previous parts of the proplem. Niwa’ °° ‘ost of ordering and car- = Without scheduling any overtime, lost sales due to stockouts would increase by 700 units per year. How- ever, by incurring overtime premiums of $90,000 per year, the increase in lost sales could be reduced to 300 units per year. This would be the maximum amount of overtime that would be feasible for Gibson. = Two warehouses currently used for rolled steel storage would no longer be needed. Gibson rents ‘one warehouse from another company under a cancelable leasing arrangement at an annual cost of ‘$80,000. The other warehouse is owned by Gibson and contains 20,000 square feet. Three-fourths of the space in the owned warehouse could be rented for $2.50 per square foot per year. Insurance and property tax costs totaling $16,000 per year would be eliminated. Gibson's required rate of return on investment is 15% per year. Gibson‘s bud ir 1 eter year ending December 31, 2017, (in thousands) is: Peal Revenues (20,000 units) s 16, Cost of goods sold * Variable costs Fixed costs ‘a Total costs of goods sold Gross margin Marketing and distribution costs Variable costs Fixed costs Total marketing and distributi ; ution cos Operating income a Scanned with CamScannerCHAPTER 20. INVENTORY MANAGEM! OS {ENT, JUST-IN-TIME, AND SIMPLIFIED COSTING METI is direct materials, $24, and conversion cost, S18. Acton has no is 5, $24, data apply to August manufacturing: dunits manufactured 19,000 ed 18,000 Acton’s August standard cost per meter direct materials variances. The followit ‘$540,000 Number of $425,000 _ Number of finished units sold Direct materials purchased Conversion costs incurred 1. Prey ‘summary journal entries for August | {without disposing of under- Si riances. costs] Actonhas no drectmaterials variances ventory Contr Fi re juirement 1 to T-accounts for 4 2 pest Geods ContolConversin Costs Control, Conversion Costs Allocated, and Cost of Goods Sold, tinuatic 20-37). Assume the ig materials purchase and sale (continuation of t 2oeae etorconCuporatonasin elem 27, excep tat now assume Acton uss a JIT production paanand backflush costing with two trigger points for making entries in the accounting system: or overallocated conversion = Purchase of direct materials Sale of finished goods i ‘these materials are in a storeroom, in ‘The inventory accounts confined solely to direct materials, whether work in a orin finished goods, No conversion costs are inventoried. They are allocated to the units sold at standard costs. Any under- or averallocated conversion costs are written off monthly to Cost of Goods Sold. 1. Prepare summary journal entries for August, including the disposi version costs. Acton has no direct materials variances. 2 Postthe entries in requirement 1 to T-accounts for Inventory Control, Conversion Costs Control, Conver- sion Costs Allocsted, and Cost of Goods Sold. 20-39 Backflush, two trigger points, completion of production and sale (continuation of 20-37). Assume the same facts for Acton Corporation as in Problem 20-37, except that now assume Acton uses a JIT pro- ‘duction system and backflush costing with two tigger points for making entties in the accounting syste in of under- or overallocated con- © Completion of good finished units of product "Sale of finished goods The inventory accounts confined solely to finished goods. Any under- or overalloceted conversion costs «re writen off monthly to Cost of Goods Sold. 1. Prepare summary journal entries for August, including the disposition of under- or overallocated con- version costs. Acton has no direct materials variances, 2 Post the ents in requirement 1 to T-accounts fr Finished Goods Control Conversion Costs Allocated, and Cost of Goods Sold. 20-40 i accounting. Reliable Security Devices (RSD) has i process and is considering the adoption of lean accounting princi losophy. The company has twa product Ines Mechanical Devices nea products are made in each line, Product-line manufa lines and then allocated tothe two indi ing system allocates al plant-level fe {the latest accountng eport using traditional cost |, Conversion Costs Control, . The company’s traditional cost account- i some corporate overhead costs to individual products, iar ‘ecounting methods included the following information Mechanical Devices Electronic Devices aa Piet ProductB "Product Product Direct material (based on quant ; Poon hee — quant 1 Piet menacing we ow sed ee im anufacturing overhead (equipment 240 ian i Supervision, production conta) " ay i = Allocated plant-level facility costs Design and mareting costs a ia , * located corporate overh o mo Operating income SO -* ™ - . Scanned with CamScannerWWW.downloadslide.com ASSIGNMENT MA otage, product B occupies 18%, product C occupies 36%, wt ining 10% of square footage is not being used. Finally, RSD has decided if S, direct material should be expensed in the perioditis purchased, rather 'Sused. According to purchasing records, direct material purchase costs during the Mechanical Devices Electronic Devices ProductA Product B Product Product D Direct material (purchases) $420 $240) $500 ‘$180 1. What are the cost objects in RSD's lean accounting system? EEE 2 Compute operating income for the cost: ciples. What would you compare this o, objects identified in requirement 1 using lean accounting prin- erating income against? Comment on your results. Concerned that the new system (a) will be too costly to man- (c) will lead to the layoff of his employees, several of whom. ‘are currently managing inventory. He believes that these layoffs will affect the morale of his entre produc- tion department. The management accountant, Bonnie Barrett, is in favor of the new system because of its likely cost savings, Frank wants Bonnie to rework the numbers because he is concerned that top mana: ‘ment will give more weight to financial factors and not give due consideration to nonfinancial factors such 4s employee morale. In addition to the reduction in inventory described previously, Bonnie has gathered the following information for the upcoming yearregarding the JIT system: ‘= Annual insurance and warehousing costs for inventory would be reduced by 60% of current budgeted WES evel ot S00, se expenses for current inventory management staff would be reduced by 15% of the budgeted euttsonon = Additional annual costs for JIT system implementation and management, including personnel costs, . Thaattona tbe of ostogs se a no IT tam exited oY oft Scanned with CamScanner