Question

The Burdell Wheel and Tire Company assembles tires to wheel rims for use on cars during manufacture of vehicles by the automotive industry. Burdell wants to locate a low-cost supplier for the tires he uses in his assembly operation. The supplier will be selected based on total annual cost to supply Burdell's needs. Burdell's annual requirements are for 25,000 tires, and the company operates 250 days a year. The following data are available for two suppliers being considered.SUPPLIER SHIPPING QUANTITY PER SHIPMENT SHIPPING COSTS PRICE / TIRE (p) INVENTORY HOLD COSTS (H) LEAD TIME (DAYS) ADMIN. COSTSLEXINGTON TIRE2,000 $18,000 $30 $6.00 6 $15,000IRMO AUTO1,000 $25,000 $29 $5.80 4 $18,000Using the Total Cost Analysis for Supplier Selection, which supplier should Burdell choose? Provide details to justify your answer.

Answer 1

Answer:

LEXINGTON TIRE provides a higher unit cost but, a lower inventory cost overall considering the ordering, holding cost, and administrative cost generated.

The company should pick LEXINGTON TIRE

Explanation:

LEXINGTON TIRE

SHIPPING QUANTITY PER SHIPMENT 2,000

SHIPPING COSTS 18,000

PRICE per TIRE 30

INVENTORY HOLD COSTS (H)  6.00

LEAD TIME (DAYS) 6

ADMIN. COSTS 15,000

Total cost:  25,000 / 2,000 = 12.5 per year

shipment cost: $18,000 per shipment x 12.5 per year =  225,000

Materials cost:

25,000 tires x $30 per tire = 750,000

Holding cost:

lead time + average inventory

6 days x 100 tires + 2,000 tires / 2 = 1,600 tires on average

times $6 holding cost = 9,600

Total cost: Inventory 225,000 + 750,000 materials + 9,600 holding + 15,000 admin

total 999,600

IRMO AUTO

SHIPPING QUANTITY PER SHIPMENT 1,000

SHIPPING COSTS   25,000

PRICE per TIRE 29(p)

INVENTORY HOLD COSTS (H)  5.80

LEAD TIME (DAYS) 4

ADMIN. COSTS 18,000

Shipping per year: 25,000 / 1,000 = 25

Ordering cost: 25 shipment x 25,000 = 625,000

Materials:

25,000 x 29 = 725,000

Holding:

lead time + average inventory

4 days x 100  + 1000/2 = 900 units on inventory throughout the year

Holding cost: 900 x $5.80 = 5,220

Total Inventory cost:

Ordering 625,000 + materials 725,000  + 5,220 holding + 18,000 admin

total = 1,355,220