Running head: EOQ 1. Mossy Mowers, LTD (Turfpro) Cost Accounting Tasks: Calculating Economic Order Quantity (EOQ) [Name] [Institution] [Date]

Transcription

1 Running head: EOQ 1 Mossy Mowers, LTD (Turfpro) Cost Accounting Tasks: Calculating Economic Order Quantity (EOQ) [Name] [Institution] [Date]

2 EOQ 2 Task 1-10 Marks: Mossy Mowers Ltd, which produces lawn mowers, purchases 27,500 units of a rotor blade part each year at a cost of $35 per unit. The company requires a 13% annual rate of return on investment. In addition, other carrying costs (for insurance, materials handling, breakage and so on) are $9.50 per unit per year. The relevant ordering cost per purchase order is $125. Required 1. Calculate Mossy Mowers EOQ for the rotor blade part. 2. Calculate Mossy Mowers annual relevant ordering costs for the EOQ calculated in requirement Calculate Mossy Mowers annual relevant carrying costs for the EOQ calculated in requirement Assume that demand is uniform throughout the year and known with certainty so that there is no need for safety stocks. The purchase order lead time is one week. Calculate Mossy Mowers reorder point for the rotor blade part. 5. What are the weaknesses of the EOQ model? Can you recommend any alternative ways of managing inventory? Solution: 1. Calculate Mossy Mowers EOQ for the rotor blade part. Robot Blade parts: 27,500 units Cost per unit = $35 per unit ARR = 13% Carrying costs = $9.50 per unit Ordering cost = $125 per order EOQ = 2CoD/CH 2CoD Economic Order Quantity (EOQ) = Ch Economic Order Quantity (EOQ) = 2*27,500*125/9.50 Economic Order Quantity (EOQ) = Calculate Mossy Mowers annual relevant ordering costs for the EOQ calculated in requirement 1. No. of orders to be placed = annual demand / EOQ No of orders to be placed = 27,500 / 850 No of orders to be placed = 32 orders Annual ordering cost:

3 EOQ 3 Annual ordering cost = cost per order * no of orders Annual ordering cost = $125 per order * 32 orders Annual ordering cost = $4, Calculate Mossy Mowers annual relevant carrying costs for the EOQ calculated in requirement 1. Annual carrying cost: Annual Carrying Cost = EOQ/2 * carrying cost per unit = 850/2 * $9.50 per unit Annual carrying cost = $ Assume that demand is uniform throughout the year and known with certainty so that there is no need for safety stocks. The purchase order lead time is one week. Calculate Mossy Mowers reorder point for the rotor blade part. Re-order point Re-order Point = 27,500/365 * 7 days Re-order Point = 527 units 5. What are the weaknesses of the EOQ model? Can you recommend any alternative ways of managing inventory? Weaknesses of EOQ Model: 1- EOQ model does not account for seasonal variations and economical fluctuation. Rather it assumes steady demand for a business product and immediate availability of items to be replenished. 2- EOQ is only applicable to non-perishable items with staple demand. 3- EOQ also ignores delivery quantities and discounts that can be obtained by the key suppliers. 4- EOQ model assumes the constant lead time, but in reality the business may experience supplier s delay. 5- EOQ model suggests how much inventory should be ordered, but it does not put any light on when it should be ordered. 6- EOQ model assumes the instant purchase of material, but in reality, procurement may take some time known as lead time. 7- EOQ model cannot be considered as one stop solution for total inventory management. Therefore, other techniques and methods should be used in conjunction with EOQ. 8- EOQ cannot be applied practically in any organization, as usually all organizations keep some safety stock. 9- EOQ model assumes that holding costs tend to be constant, but in practical, holding costs vary in line with the quantities that are hold. Holding costs may sometimes tend to be step costs as well.

4 EOQ 4 Several ways to inventory management: There are several methods for inventory management. They all aim at providing an efficient system for designing what, when and how to order? An organization may select one or a combination of two or more methods to manage inventory. Minimum stock level: An organization may identify minimum stock level and re-order stock when reaches to it. Just-in-time: JIT aims at reducing the stock costs by keeping zero or minimum stock. Items may be delivered or purchased only when they are needed. Organization with JIT inventory system always bear a risk of running out-of-stock. Therefore, the organization should ensure that supplier may deliver on time. Batch control: Organization may produce goods in batches. It should make sure that sufficient stock is available to meet the need until the next batch production. Stock review: The organization may also regular review of stock and may place an order to return stock to predetermined level. Instructions and Context

5 EOQ 5 Task 4 (10 marks) (Max. 500 words) Wenson and Gommi Ltd (WGL) produces babycare products. WGL prides itself on its commitment to environmental protection and many of its advertisements focus on its slogan, Taking care of your baby, and your baby s future. One of their most popular products is a sky-blue nappy with pictures of the earth that glow softly in the dark. Producing this effect requires a chemical process that produces dioxins (a highly toxic and persistent organic chemical) as a waste product. The Australian government introduced a national approach to deal with dioxins that included measurement and reduction programs. In response WGL decided to outsource production to a Pacific island nation where unemployment is a major problem. WGL does not have any ownership interests in this production company, but is its only customer. The government of this Pacific nation was very pleased to have this employment opportunity moving to their country and has been willing to ignore the possible detrimental impact on their environment. Now the only problem facing WGL are criticisms that the nappies are not biodegradable. WGL is not concerned, however, since that is a problem for its customers. Required 1. Discuss the principle of life-cycle analysis and how it might apply to WGL. 2. WGL is considering preparing GRI reports. Will WGL be required to report on the production of the nappies? Why or why not? 3. What options might be available to manage WGL s environmental impact? 4. What arguments can you provide for WGL to incur additional costs to reduce the environmental impact of the production and disposal of their nappies, even though production and disposal are performed by others?

6 EOQ 6 1- #1 Discuss the principle of life cycle analysis and how it might apply to WGL. Life cycle analysis refers to a technique that assesses environmental impacts and how they are linked to the stages of a product s life since from its inception to the end or cradle to grave (i.e. from the extraction of raw material though processing of material, distribution, usage, repair and maintenance and recycling or disposal). Life cycle analysis can be applied to WGL because it will enable the company to quantify how much energy and raw materials are used and how much waste, either liquid, solid or gaseous (either dioxin), is being produced at each stage of the product Nappy life. Life Cycle analysis will also help WGL evaluate the potential impacts associated with the identified inputs and releases. Life cycle analysis will also be able to help WGL make more informed decisions about how to make biodegradable nappies so that it can enhance its position towards environment protection and make its customers more satisfied. 2- WGL is considering preparing GRI reports. Will WGL be required to report on the production of the nappies? Why or why not? By using the GRI guidelines, WGL will be disclosing its most critical impacts either negative or positive on the environment, society and economy. WGL will be making disclosure in the report on the production of the nappies under specific standard disclosures. In order to enhance its image on being socially and environmentally responsible, WGL needs to disclose the following Impacts on environment: - Materials - Energy - Water - Biodiversity - Emissions and wastes As it is evident in the scenario, that WGL s nappies are not biodegradable and that is a concern for the customers. Therefore, WGL will be required to report the concern that have been raised through customers (stakeholders engagement), and how the organization has responded to this concern. However, WGL has outsourced the nappies production to pacific nation, and has no material interest and ownership in the pacific nation except for being a customer, therefore WGL has not been required to report the detrimental impacts of production in the pacific nation. 3- What options might be available to manage WGL s environmental impacts? Introducing the chemical process that eliminates the production of dioxin. Encouraging the participation and involvement in the measurement and reduction programs introduced by the Australian Government to deal with the dioxin. Ensuring the compliance with government policies to reduce the wastes and chemical emissions.

7 EOQ 7 Introducing the process that allow the production of biodegradable nappies, so that customers become satisfied. 4- What arguments can you provide for WGL to incur additional costs to reduce the environmental impacts of production and disposal of their nappies, even though production and disposal are performed by others? WGL can incur additional costs to reduce the environmental impacts of production and disposal of nappies. The company may introduce the processes that may reduce the production of dioxin that contaminates the environment. The company may also introduce the process that recycle the nappies in the WGL s home country. The company may also buy its materials from the sustainable suppliers who provide material that are eco-friendly. The company should incur costs to comply with the government policies. The company should act to satisfy its customers, by letting them know that they are concerned with their babies by producing the safer products in the ways that do not harm their children.