Question

JL.83 Skullcandy makes a variety of earbuds and earphones that are popular among college students. Many of their products use a standard thin black cable which is purchased from a local supplier in 800-foot reels. In recent months the company has been implementing JIT and Lean principles in order to reduce costs and improve quality. One such initiative has led to a VMI (vendor managed inventory) agreement with its cable supplier, thus reducing Skullcandy's ordering costs from $29.22 to $3.80. Annual demand is 3,800,000 feet. Annual holding costs are $1.90 per 800-foot reel.

A. Based on this information, what will be the new optimal order quantity for reels (using the reduced ordering cost)? (Display your answer to the nearest whole number.)

B. When using the reduced ordering cost, as compared to the original ordering cost, how many reels on average will Skullcandy hold in inventory (assuming they hold no safety stock)? (Display your answer to the nearest whole number.)

C. What will be the annual total combined savings to ordering costs and holding costs when using the reduced order cost, as compared to the original ordering cost? (Display your answer to two decimal places.)

Answer 1

The new optimal order quantity for Skullcandy using the reduced ordering cost is 3897 reels. On average, without safety stock, Skullcandy will hold 1949 reels in inventory. The annual total combined savings from ordering costs and holding costs have to be calculated based on the differences in costs before and after the VMI agreement.

Step-by-step explanation:

The economic order quantity (EOQ) model can be used to determine the new optimal order quantity for reels with the reduced ordering cost. The standard EOQ formula is √(2DS/H), where D is the annual demand, S is the ordering cost, and H is the holding cost per unit. Using Skullcandy's data (D = 3,800,000 feet, S = $3.80, H = $1.90 per 800-foot reel), we can calculate the EOQ as follows:

EOQ = √((2 * 3,800,000 * 3.80) / 1.90) = √(28,880,000 / 1.90) = √15,200,000 = 3897.31 reels approximately, and for the nearest whole number, it's 3897 reels.

To find out how many reels on average Skullcandy will hold in inventory, we divide the EOQ by 2: 3897 / 2 = 1948.65 reels, which rounds to 1949 reels.

For the annual combined savings, we'll need to calculate the difference in ordering and holding costs before and after the VMI agreement. With the original ordering cost, the EOQ was calculated using $29.22 as the ordering cost, which gives a different EOQ than using $3.80. Once those two EOQs are calculated, we multiply the number of orders per year by the respective ordering costs and add the average inventory holding costs, then subtract the new total costs from the original total costs. This calculation will be implemented to give us the total combined savings.