Help s finance term case 2 (page 5 of 6) MINI CASE Andria Mullins, financial manager of Webster Electronics, has been asked by the firm's CEO, Fred Weygandt, to evaluate the company's inventory control techniques and to lead a discussion of the subject with the senior executives. Andria plans to use as an example one of Webster's "big ticket" items, a customized computer in its laptop computers. Each chip costs Webster $200, and it must also pay its supplier a $1,000 setup fee on each order; the minimum order size is 250 units, Webster's annual usage forecast is 5,000 units, and the annual carrying cost of this item is estimated to be 20% of the average inventory value. microchip that the firm uses Andria plans to begin her session with the senior executives by reviewing some basic inventory concepts, after which she will apply the EOQ model to Webster's microchip inventory. As her assistant, you have been asked to help her by answering the following questions a. Why is inventory management vital to the financial health of most firms? b. What assumptions underlie the EOQ model? c. Write out the formula for the total costs of carrying and ordering inventory, and then d. What is the EO0 for custom microchips? What are total inventory costs if the HOO e. What is Webster's added cost if it orders 400 units at a time rather than the EOQ f. Suppose it takes 2 weeks for Webster's supplier to set up production, make and test use the formula to derive the EOQ model. is ordered? quantity? What if it orders 600 units? the chips, and deliver them to Webster's plant. Assuming certainty in delivery times and usage, at what inventory level should Webster reorder? (Assume a 52-week year, and assume Webster orders the EOQ amount.) Of course, there is uncertainty in Webster's usage rate as well as in delivery times, so the company must carry a safety stock to avoild running out of chips and having to halt production. If a 200-unit safety stock is carried, what effect would this have on total inventory costs? What is the new reorder point? What protection does the safety stock provide if usage increases or if delivery is delayed? h. Now suppose webster's supplier offers a discount of 1% on orders of 1,000 or more. Should Webster take the discount? Why or why not? i. For many firms, inventory usage is not uniform throughout the year but instead follows some seasonal pattern. Can the EOQ model be used in this situation? If so, how
