CASE 18 1

BOWEN BUILT, INC.

INVENTORY –
ECONOMIC ORDER
QUANTITY

Marco, Lycka R.
Mercado, Jonathan I.
 6

QUESTION NO. 1
• 𝑐 = 0.2 × 30 = 6
• 𝑂 = 300 + 60 = 360

2𝑆𝑂 2×12,000×360
EOQ = 𝑐
= 0.2×30
= 397.5 =
380 𝑢𝑛𝑖𝑡𝑠

The total EOQ cost is,

360 × 12,000 6 × 380

𝑇𝐶 30 = +
380 2
= $12508.42
𝑇𝐶 30
(360) × 12000 6 × 500
= +
500 2
= $10140
 QUESTION NO. 2
Option 1 Option 2
𝑐 = 0.2 × 29 = 5.8 𝑐 = 0.2 × 28.5 = 5.7

2 × 12,000 × 60 2 × 12,000 × 60
𝐸𝑂𝑄 = 𝐸𝑂𝑄 =
5.8 5.7
= 498.27 = 498 𝑢𝑛𝑖𝑡𝑠 = 502.62 = 503 𝑢𝑛𝑖𝑡𝑠

𝑇𝐶 29 𝑇𝐶 28.5
60 × 12,000 5.8 × 498 60 × 12,000 5.7 × 503
= + = +
498 2 503 2
= $2890 = $2865
 8

QUESTION NO. 3
Yes, Bowen should use Kentech because they
offer pump with lower price than Precision. The lower
the price, the lower the carrying cost. Also, there no
handling fee per order for Kentech. Bowen can save
$300 per order if he use Kentech.
𝑆 12,000
𝑁𝑜 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟 = = =
𝑄 500
24 𝑜𝑟𝑑𝑒𝑟𝑠

H𝑎𝑛𝑑𝑙𝑖𝑛𝑔 𝑓𝑒𝑒 = 24 × $300

= $7200
 9

QUESTION NO. 4

Bowen should order 1,000 units with the price $29 per unit. He
can save up to $2440.
Option 1 Option 2
Q= 1,000 Q= 2,000
𝑇𝐶 29 𝑇𝐶 28.5
(60) × 12,000 5.8 × 1,000 60 × 12,000 5.7 × 2,000
= + = +
1,000 2 2,000 2
= 3620 = 6060

TC (28.5) –TC (29) = $6060-$3620 =$2440

 QUESTION NO. 5
EOQ Assumptions:
• Constant or uniform demand
• Constant unit price
• Constant carrying costs
• Constant ordering cost
• Instantaneous delivery
• Independent orders
• The assumption is reasonable, because Bowen
"make-to-stock" strategy and the item has relatively stable demand.
Carrying costs and setup or ordering costs are knownnandBuilt Inc use
relatively stable.
 QUESTION NO. 6
Factors besides EOQ in determining
supplier.
• Terms of credit
• Location of the supplier
a
• Credit worthiness of the supplier
• Warehousing facilities available with the
supplier
• Size of the supplier’s firm and their product
quality control
 QUESTION NO. 7
• Reorder Point when safety stock is generously
2 weeks:
RP = (2 * 240) + 2 * 240 = 960 Cost Reduction by Adjusting
Reorder Point:
• Reorder point whe safety stock is trimmed
into 1 week: • Perry decided to study in detail
RP = (2 * 240) + 1* 240 = 720 a single item, brake pumps, to
• Number of orders in a year:
help him learn more about the
potential savings. Therefore,
RP (Safety Stock 2 weeks)  12,000 / 960 = 12.5
times the specific item that is
RP (Safety Stock 1 week)  12,000 / 720 = 16.67 examined is the brake pumps.
times • Annual usage of Brake
Pump: 12,000 units
• Units of safety stock annually: • Operation Time in a Year: 50
weeks
RP (Safety Stock 2 weeks)  12.5 * 2* 280 = 6,000
units • Weekly usage of Brake Pump:
RP (Safety Stock 1 week)  16.67 *1* 280 = 4,000
units
• Total amount of reduction of safety stock:
 QUESTION NO. 8
Carrying Cost:
• Total cost of holding inventory over some
period of time
• Short term
• Warehousing costs rent, utilities and salaries, financial costs such
as opportunity cost, and inventory costs related to perishability,
pilferage, shrinkage and insurance.
• Utilized to help determine how much profit can be made on
current inventory
• Helps to find out if there is a need to produce more or less
Carrying cost is expected to be a short term because
cost like rent, utilities, insurance, breakage is paid not
in a long term basis. Often the costs are computed for
annually and then
 QUESTION NO. 9
Change in Carrying Cost Affecting EOQ:

• Surely a change in carrying cost will affect the EOQ

• The more carrying cost needed, the lower rate of EOQ will be
generated.

• Suppose the carrying cost is now 30 percent, surely this would

affect the EOQ. The EOQ will be reduced by around 41% from
the EOQ with the carrying cost of 20 percent
 ANSWERS 15

• However, even though a change in carrying cost influence the overall

EOQ, the change will not affect the choice of supplier in this case.
• Because the preference of supplier does not rely on the carrying cost but to
the Order Cost per order.
• Carrying Cost is calculated as Carrying Cost
percentage x Cost per unit
• So in this case, we can see the increment in Carrying cost
percentage will increase the overall Carrying cost for both
of the supplier.
 17

QUESTION NO. 10
How a growing firm could be profitable but have cash flow problem
• Low profits or losses
• Over-investment in capacity
• Too much stock and poor inventory management
• Allowing customers too much credit
• Overtrading and growing too fast
• Seasonal demand
• Over investment in fixed assets
 18

QUESTION NO. 11
Should separate parts inventory into groups according to
value?

• It is appropriate to group similar or related parts for inventory

relating to the same product and for inventory that cannot be
evaluated separately from other parts in that product line because it
is not yet considered as finished goods