Dallas Auto Glass is a regional distributor of automobile window glass. The windshields are manufactured in Mexico and shipped to Dallas. Management is expecting an annual demand of 10,800 windshields.

The purchase price per windshield is \($415.\) Other costs associated with ordering and maintaining an inventory of these windshields are as follows:

• The historical ordering costs incurred in the Purchase Order Department for placing and processing orders are shown below.

Management expects the ordering costs to increase 16 percent over the amounts and rates experienced the last three years.
• Dallas Auto Glass operates on a six-day workweek for 50 weeks each year. The firm is closed two weeks each year.
• Each order is inspected by both Mexican and U.S. officials at the border. A \($47\) fee is charged.
• A clerk in the Receiving Department receives, inspects, and secures the windshields as they arrive from the manufacturer. This activity requires eight hours per order received. This clerk has no other responsibilities and is paid at the rate of \($12\) per hour. Related variable overhead costs in this department are applied at the rate of \($3\) per hour.
• Additional warehouse space will have to be rented to store the new windshields. Space can be rented as needed in a warehouse at an estimated cost of \($2,500\) per year plus \($4.25\) per windshield.
• Breakage cost is estimated to average \($4.00\) per windshield.
• Taxes and fire insurance on the inventory are \($1.25\) per windshield.
• Other storage costs amount to $10.50 per windshield.

Six working days are required from the time the order is placed with the manufacturer until it is received.

Required: 

Calculate the following values for Dallas Auto Glass Company.
1. The value of the ordering cost that should be used in the EOQ formula.
2. The value of the storage cost that should be used in the EOQ formula.
3. The economic order quantity.

4. The minimum annual relevant cost of ordering and storage at the economic order quantity.
5. The reorder point in units.
6. Management has been able to negotiate a JIT purchasing agreement with the Mexican manufacturer, and the inspection fee has been renegotiated with the border officials. The purchasing manager has determined that JIT purchasing would enable the company to reduce the cost per order to \($32.40\). Moreover, she has analyzed the cost of storing windshields, taking care to include the cost of wasted space and inefficiency. She estimates that the real annual cost of holding inventory is \($60\) per windshield.

a. Calculate the new EOQ, given the purchasing manager's new cost estimates.

b. How many orders would now be placed each year?

c. Compute the new minimum annual relevant cost of ordering and storage.

Transcribed Image Text:

Year 20x0. 20x1 20x2... Orders Placed and Processed 17 48 97 Total Processing Costs $12,000 12,010 12,400