Question

Parker Hi-Fi Systems Parker Hi-Fi Systems, located in Wellesley, Massachusetts, a Boston suburb, assembles and sells the very finest home theater systems. The systems are assembled with components from the best manufacturers worldwide. Although most of the components are procured from wholesalers on the east coast, some critical items, such as LCD screens, come directly from their manufacturer. For instance, the LCD screens are shipped via air from Foxy, Ltd., in Taiwan, to Boston’s Logan airport, and the top-of-the-line speakers are purchased from the world-renowned U.S. manufacturer Boss. Parker’s purchasing agent, Raktim Pal, submits an order release for LCD screens once every 4 weeks. The company’s annual requirements total 500 units (2 per working day), and Parker’s per unit cost is $1,500. (Because of Parker’s relatively low volume and the quality focus—rather than volume focus—of many of Parker’s supplies, Parker is seldom able to obtain quantity discounts.) Since Foxy promises delivery within 1 week following receipt of an order release, Parker has never had a shortage of LCDs. (Total time between date of the release and date of receipt is 1 week or 5 working days.) Parker’s activity-based costing system has generated the following inventory-related costs. Procurement costs, which amount to $500 per order, include the actual labor costs involved in ordering, custom inspection, arranging for airport pickup, delivery to the plant, maintaining inventory records, and arranging for the bank to issue a check. Parker’s holding costs take into account storage, damage, insurance, taxes, and so forth on a square-foot basis. These costs equal $150 per LCD per year. With added emphasis being placed on efficiencies in the supply chain, Parker’s president has asked Raktim to seriously evaluate the purchase of the LCDs. One area to be closely scrutinized for possible cost savings is inventory procurement.

Discussion Questions
What is the optimal order number of LCDs that should be placed in each order?

Answer 1

The optimal order number of LCDs that should be placed in each order is 42 units.

Explanation:

\The Economic Order Quantity (EOQ) formula is used to determine the optimal order quantity by balancing the ordering costs and holding costs. In this case, EOQ can be calculated using the formula: EOQ = √((2 * D * S) / H), where D represents annual demand, S represents ordering cost per order, and H represents holding cost per unit. Substituting the given values—annual demand of 500 units, ordering cost of $500 per order, and holding cost of $150 per unit—into the formula results in an EOQ of approximately 42 units.

This quantity minimizes the total inventory costs associated with procurement and holding while ensuring efficient inventory management. Ordering fewer units could increase ordering costs due to more frequent orders, while ordering more units would escalate holding costs. Thus, ordering 42 units per order strikes a balance in minimizing total inventory expenses.