In this assignment you will work for Meg Willoughby, head of Materials Management at VMH. She has a special offer from a supplier of cholesterol-testing kits that needs to be evaluated. You need to meet with Meg.

"Hi. How's it going? Are we keeping you busy enough? I heard that you did a good job on your previous assignments. Let me tell you about my inventory replenishment problem. We have been purchasing 600 cholesterol-testing kits for the Lab every three months. The Lab estimates that it uses about 1200 kits every six months (which is their planning horizon). These kits cost us $30.00 per dozen. The supplier has been very reliable and consistently delivers the materials ordered in 30 days. There is no uncertainty about supply lead time. However, the number of kits used each month by the lab is not certain because we can not accurately predict demand. We keep a safety stock of one month's average requirement. I am not sure if we need to hold this much safety stock, but I was burned once during a trucking strike so I am a little cautious now. Yesterday the supplier offered us a price of $2.00 per kit if we purchase a minimum of 15 cases at a time (there are 12 dozen kits in a case). I'm not sure whether to take the deal or not. I want you to analyze the problem and make a recommendation. Also, Peggy Dundee in the lab tells me that a new cholesterol kit is currently being tested by the Food and Drug Administration (FDA). This new kit might make the other kits obsolete. She believes there is a 10 percent chance of the new one being approved and we will know in nine months. Explain how this affects your recommendation."

"Our purchasing department's annual payroll without fringe benefits is $100,000. Fringe benefits are assessed at 20 percent of the payroll cost. The purchasing department occupies 500 square feet of space that costs $2.00 per square foot per month, or $24.00 per square foot per year. In addition to their payroll and space costs, the normal annual overhead rate is 40 percent of the total purchasing labor cost (payroll plus fringe benefits). The purchasing department typically processes about 700 orders per month or 8400 orders per year. Holding inventory is quite costly. Our secured, climate-controlled storage space is expensive to maintain. The finance department estimates a holding cost of $10.00 per case per month or $120.00 per case per year. Remember that there are 12 dozen kits per case. This cost is high because the secured storage must be guarded, insured, heated, cooled, and inventoried. In addition, there is a problem of shrinkage, spoilage, and breakage. The finance department uses a 10 percent rate as the cost of capital."

1. Develop an estimate for the fixed ordering cost at VMH.

2. Develop an estimate for the current annual holding cost per unit at VMH.

3. Develop an estimate for the annual holding cost per unit for the supplier's offer.

4. Develop a recommendation with regards to accepting or rejecting the offer.

5. Present your results in a memo. Explain how you came to your conclusions. Show every step of your work, both for Meg's information and in case she gets audited.