Relevant Costs of Inventory Planning; Sensitivity Analysis (G. Feltham) The Super Corporation distributes widgets to the upper delta region of the Sunswop River. The demand for widgets is very constant and Super is able to predict the annual demand with considerable accuracy. The predicted demand for the next couple of years is 200,000 widgets per year.

Super purchases its widgets from a supplier in Calton at a price of $20 per widget. In order to transport the purchases from Calton to the upper delta region, Super must charter a ship. The charter services usually charge $1,000 per trip plus $2 per widget (this includes the cost of loading the ship). The ships have a capacity of 10,000 widgets. The placing of each order, including arranging for the ship, requires about 5 hours of employee time. It takes about a week for an order to arrive at the Super warehouse.

When a ship arrives at the Super warehouse, the widgets can be unloaded at a rate of 25 per hour per employee. The unloading equipment used by each employee is rented from a local supplier at a rate of $5 per hour. Supervisory time for each shipload is about 4 hours.

Super leases a large warehouse for storing the widgets; it has a capacity of 15,000 widgets. The employees working in the warehouse have several tasks:

a. Placing the widgets into storage, after they are unloaded, can be done at the rate of about 40 per hour.

b. Checking, cleaning, etc., of the widgets in inventory requires about one-half hour per widget per year.

c. Removing a widget from inventory and preparing it for shipment to a customer requires about one-eighth hour.

d. Security guards, general maintenance, etc., require about 10,000 hours per year.
The average cost per hour of labor is approximately $10 (including fringe benefits). Super has developed the following prediction equation for its general overhead (excluding shipping materials, fringe benefits, and equipment rental):
Predicted overhead for the year = $1,000,000 + ($8 X Total Labor Hours)
The materials used to ship one widget to a customer cost $1, and the delivery costs average out to about $2 per widget.
The company requires a before-tax rate of return of 20 percent on its investment.
required 1. Super has decided to base its ordering policy on an EOQ model. What amount should they order each time and what should they use as the reorder point?
Show all calculations.
2. If the true overhead prediction equation is $800,000 + ($12 X Total Labor Hours)
what is the cost of the prediction error? lop5