Individual Homework Assignment 3

Version A
1) The assignment is to be completed in electronic format (Excel or Word is acceptable). Note
that you may be asked to submit an electronic copy of your assignment.
2) The assignment is due at the beginning of class on Tuesday, April 8, 2014.
3) The assignment is worth 25 points.

Smith Corporation produces bucket loader assemblies for the tractor industry. The product has a long term life expectancy. Smith has decided to implement a JIT inventory system. Smith is deciding whether
to use ABC Co. or XYZ Co. as the supplier. The following relevant information is available for analysis:

One time cost to rearrange the shop floor into manufacturing cells is $300,000
One time cost to retrain the existing workforce for JIT skills is $75,000
Monthly demand is 2,000 units.
Purchase orders from ABC will cost $3.25 each. Purchase orders from XYZ will cost $3.50 each.
ABC will charge $55 per unit. XYZ will charge $50 per unit.
ABC’s units will be inspected at a cost of 25 cents per unit.
Smith’s required annual rate of return is 10%.
Stock-out costs are expected to be $2 per unit for ABC and $3 per unit for XYZ.
Stock-out units are expected to be 10% of the order quantity for ABC and 8% for XYZ. These
stockouts are anticipated to occur during each reorder period.
Other annual carrying costs are 1% of the unit purchase cost for ABC and for XYZ.

1) What is the EOQ if Smith chooses ABC Co.?
2) What is the EOQ if Smith chooses XYZ Co.?
3) From a quantitative perspective, which supplier should Jones use to implement the JIT system?
Show the computations supporting your decision. Note that your solution should be in
professional format, and should include a proper heading, date, consistent formatting, etc.
4) What is the minimum amount of cost savings (in dollars) that Smith would need to save by
implementing the JIT system in order for the project to yield an acceptable return on investment?

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