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Inventory Managment: Cost Accounting

Larsen inc. uses 160000 plastic housing units each year in its production of paper shredders. The cost of placing an order is $60. The cost of holding one unit of inventory for one year is $7.50. Currently Larsen places 40 orders of 4000 plastic housing units per year.

1. Compute the annual ordering cost.
2. Compute the annual carrying costs.
3. Compute the cost of Larsen's current inventory policy. Is this the minimum cost? Why or why not?

Casing manufacturing produces casings for sewing machines: large and small. To produce the different casings, equipment must be set up. The setup cost per production run is $9000 for either casing. The cost of carrying small casings in inventory is $3/case per year; the cost for large casings is $9/unit per year. To satisfy demand, the company produces 600000 small casings and 200000 large casings.

1. Compute the number of large casings that should be produced per setup to minimize total setup and carrying costs for this product.
2. Compute the setup, carrying, and total costs associated with the economic order quantity for the large casings.
DD Products Inc. produces cornflakes and branflakes. The manufacturing process is highly mechanized; both products are produced by the same machinery by using different settings. For the coming period, 200000 machine hours are available. Management is trying to decide on the quantities of each product to produce. The following data are available.

Cornflakes Branflakes
Machine hours per unit 1.00 0.50
Unit selling price $2.50 3.00
Unite variable cost 1.50 2.25

1. Determine the units of each product that should be produced in order to maximize profits.
2. Because of market conditions, the company can sell no more than 150000 boxes of cornflakes and 300000 boxes of branflakes. Do the following:
a. Formulate the problem as a linear programming problem.
b. Determine the optimal mix using a graph.
c. Compute the maximum contribution margin given the optimal mix.


Solution Preview

Please see the attached files.

1. Given the following information:
Demand per year (d) = 160000 units, Ordering cost (K) = $60 per set up
Unit holding cost (h) = $7.50 per year, Number of orders = 40
Order quantity (q) = 4000 units
1. Annual ordering cost = 40 K = 40 x 60 = $2,400.00
2. Annual Carrying cost = ½ q h = (4000 x 7.5)/ 2 = $15,000.00
3. Cost of inventory policy = $2,400. 00 + $15,000.00 = $17,400.00
It can be easily seen that the above cost is not the minimum cost. Because, as per theory:
Economic order quantity (EOQ) = = 1600
Minimum cost = = $12,000.00
2. In this problem we are concerned ...

Solution Summary

This solution assists with the inventory problems attached. Cost accounting for inventory management are given.