Reference no: EM132520909
Thompson Trailers (TT) manufactures utility trailers for small landscaping companies to haul their equipment to residential sites. Demand for the trailers is fairly even throughout the year, as snow removal companies make use of them to haul their equipment in winter.
The trailers are manufactured at Thompson's plant in Agassiz, BC. The company has enjoyed significant growth over its five years of operations. As such, Terry Thompson, the owner and CEO of the company would like to ensure the plant is operating efficiently. He has hired you, as a consultant to review the company's manufacturing and inventory practices.
To assist with your analysis, Terry asked his cost accountant to summarize some of the key financial figures relating to inventory:
- Steel is the major direct material in the production of the trailers. It makes up 85% of the inventory value. Annual current requirements for steel are 182,160 kg per year.
- Steel is ordered on a monthly basis from Nikolay Metals Inc. TT has a purchasing agent who contracts with TT to order in the steel. The agent, who works away from TT's office, writes up the order on a paper document, faxes it to the supplier and follows up via phone to ensure the order is filled. She charges $380 per order. This is the only order cost incurred.
- Steel prices for the year average around $1.20 per kilogram.
- Annual costs of warehouse leasing, insurance, utilities and management are $8.80 per kilogram of steel.
a. Inventory control.
Question i. Current system: Given current ordering practices, what is the total annual relevant cost of ordering and carrying inventory.
Question ii. Using Economic Order Quantity, what is the optimal order size (in kilograms) TT should use to minimize total annual order and carrying costs.
Question iii. Calculate the savings incurred in ordering using the order quantity calculated in part (ii)