After some pressure from LaPlace management

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Reference no: EM132229368

The northwestern Division of The Ritz Power and Booze Company is responsible for providing dependable electric service to customers in and around the area of Metairie, Kenner, Destrehan, LaPlace, Lutcher, Hammond, Pontchatoula, Amite, and Bogalusa, Louisiana. One material used extensively to provide this service is the 1/0 AWG aluminum triplex cable, which delivers the electricity from the distribution pole to the meter loop on the house. The Southeastern Division Storeroom purchases the cable that this division will use. For the coming year, this division will need 499,500 feet of this service cable. Because this cable is used only on routine service work, practically all of it is installed during the 5 normal workdays. The current cost of this cable is 41.4 cents per foot. Under the present arrangement with the supplier, the Southeastern Storeroom must take one twelfth of its annual need every month.

This agreement was reached in order to reduce lead time by assuring LaPlace a regular spot on the supplier’s production schedule. Without this agreement, the lead time would be about 12 weeks. No quantity discounts are offered on this cable; however, the supplier requires that a minimum of 15,000 feet be on an order. The Southeastern Storeroom has the space to store a maximum of 300,000 feet of 1/0 AWG aluminum service cable.

Associated with each shipment are ordering costs of $50, which include all the costs from making the purchase requisitions to issuing a check for payment. In addition, inventory carrying costs (including taxes) on all items are considered to be 10% of the purchase price per unit per year.

1. After some pressure from LaPlace’s management, the supplier has agreed to drop the $200 annual fee but can no longer guarantee a 12 week delivery time. Instead, the delivery time will be 12 weeks on average with a standard deviation of 3 weeks and normally distributed. LaPlace knows that with delivery time uncertainty, a shortage could be possible. After conducting some analysis, LaPlace feels that cost of shortage is 52 cents/foot. If it takes this new option, what is the economic order quantity and reorder point?

Reference no: EM132229368

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