Reference no: EM132935000

Question - Oakey Wines has recently signed an agreement with a co-operative vineyard to be supplied with a rare variety of grapes which is used to make a unique wine. Management is expecting to have an annual demand of 10,800 tonnes. The purchase price is $400 per tonne. Other costs associated with ordering and maintaining the grapes are shown below:

The cost of placing and processing orders are:

Year Number of orders processed Total processing costs

1 17 $12,300

2 55 $12,475

3 97 $12,700

-Management expects these processing costs to increase by 16% per order over the average rate experienced in the last 3 years.

-Each order is inspected for foreign matter by the Department of Agriculture. A fee of $47 is charged.

-The receiving department receives and inspects each delivery. This requires 4 hours per order at a cost of $24 per hour. Variable overhead costs for the receiving department is $6 per hour.

-Additional warehouse space is required during the harvest season. Space for the season is charged at $2,500 plus $6.25 per tonne.

-Spoilage cost is estimated to average $4 per tonne

-Insurance on the inventory cost $1.25 per tonne

-Other carrying costs amount to $8.50 per tonneRequired:

Assuming that all costs remain the same, calculate the following amounts for Oakey Wines in Year 4:

a) The amount of the ordering cost that should be used in EOQ formula. (hint: use the high-low method for processing cost per order)

b) Amount of carrying cost that should be used in the EOQ formula.

c) Economic order quantity

d) Minimum average relevant costs of ordering and carrying the EOQ

Management was able to negotiate a JIT purchasing agreement with the Co-op and the inspection fee has been renegotiated. The purchasing manager has determined that JIT purchasing would enable the company to reduce the ordering costs to $32.50 per order. Taking into consideration wasted space and inefficiency it has been estimated a further $60 per tonne could be saved.

e) Calculate the new EOQ, given the new cost estimates

f) How many orders would be placed per year?

g) Calculate the minimum annual relevant cost of ordering and carrying inventory.

h) Explain to management what benefits there would be for Oakey Wines if they were to implement JIT inventory system? Should Oakey Wines change inventory policy to implement a JIT system?