Reference no: EM132687860

Problem 1: How do find the estimate for the fixed ordering cost in this scenario?

• We estimate that about 1% of the 60,000 passengers we transport each month will need the shot during their cruise. These syringes normally cost us $96 per dozen. The supplier has been very reliable and consistently delivers the materials ordered in 30 calendar days. There is no uncertainty about supplier lead time. However, the number of syringes used each month by the onboard medical office is not certain because we cannot accurately predict demand. We keep a safety stock of one month's average requirement. I am not sure if we need to hold this much safety stock, but I was burned once when we hit some really turbulent seas, so I am a little cautious now.

• In addition, Peggy Johnson (the corporate medical officer) tells me that a new motion sickness medicine is currently being tested by the Food and Drug Administration (FDA). This new medicine might make the other medicine obsolete. She believes there is a 10% chance of the new medicine being approved and we will know in approximately nine months. Explain how this might affect your recommendation.

• "Our corporate purchasing department's annual payroll including fringe benefits is $300,000. The purchasing department occupies 500 square feet of space that costs $4.00 per square foot per month, or $48.00 per square foot per year. In addition to their payroll and space costs, the normal annual overhead rate is 40% of the purchasing labor cost. The purchasing department typically processes about 1000 purchase orders monthly. Holding inventory is quite costly since this medicine must be refrigerated and kept in a secured area. Corporate accounting estimates a holding cost of $10 per dozen per month. In addition, there is a problem of perishability which accounting believes occurs about 4% of the time. The accounting department uses a 15% rate as the cost of capital."