Reference no: EM132655887

You are the financial analyst at Free Sports Club, a leading manufacturer of protective equipment for use in contact sports.

• The company manufactures a range of products, including shoulder pads for use by players of French football. These pads comprise a soft plastic shell with foam padding underneath, metal rivets and elastic straps. Free Sports Club sells all of its products to retailers on a credit basis.
• Estimated annual usage of soft plastic in Free Sports Inc's manufacturing process is 27,000 kilograms. This is used evenly throughout the year other than during July and August, when production increases to meet demand due to the start of the French football season in September, and during November, when production increases to meet demand prior to the Christmas holiday in December. 
• Inventory holding costs for soft plastic are estimated to be $1.75 per kilogram per year. The estimated cost of placing and processing each order of soft plastic is $14. 
• Throughout the year, it is estimated that soft plastic will cost an average of $0.90 per kilogram. However, forecast fluctuations in demand mean that the cost of soft plastic could vary from a maximum of $1.90 per kilogram and a minimum of $0.75 during the year.Free Sports Club imports soft plastic from Italia Productions plc, China. Recent disputes with this supplier have led Free Sports Club to maintain a 'buffer' inventory to manage the risk of disruption to this supply. Italia Productions plc offers a 7.5% bulk purchase discount on orders of soft plastic of 10,000 kilograms or more. 
• The company's approach to inventory management was discussed at a recent meeting of Free Sports Inc's senior executive team. Grace Rodriguez, Chief Executive at Free Sports Club, is an advocate of just-in-time (JIT) inventories management. Grace has questioned the company's current approach to the management of its inventory of soft plastic and has commented: 
• Holding inventories results in costs for the company. We could avoid these costs if we introduce a JIT approach to the management of our inventory of soft plastic. Inventories management models and information technology are available to help us. 
• Smith Cousins, Chief Operating Officer at Free Sports Club, has pointed out that the successful management of inventories involves a number of practical issues. Smith has commented: 
• Inventories management models and information technology are useful, but I am sure that there are other issues that we need to consider. I would like to know more about the practical implications of managing inventories.

Required:

Question (a) Calculate the economic order quantity (EOQ) for soft plastic.

Question (b) Calculate the total annual cost of soft plastic.

Question (c) Critically evaluate Free Sports Inc's decision to use the EOQ model as part of its approach to the management of inventories.

Question (d) Advise Free Sports Inc's senior executive team on the comments made by Grace Rodriquez and Smith Cousins. Your advice should include an explanation of the costs of holding inventories, the costs of failing to manage inventories properly and the practical implications of managing inventories.