PROBLEM 1

Brooke Army Medical Center dispenses 250,000 bottles of brand name pharmaceutical annually.The optimal safety stock (which is on hand initially) is 1,000 bottles.Each bottle costs the center $10, inventory carrying costs are 30 percent, and the cost of placing an order with its supplier is $175.

a. What is the economic order quantity?

b. What is the maximum inventory for this medication?

c. What is the center's average inventory of bottles of this medication?

d. How often must the center order (in days)?

ANSWER

Ordering costs F $175

Annual usage in units S 250,000

Annual carrying costs C 30%

Purchase price per bottle P $10.00

Days per year W 360

Safety stock SF 1,000

PROBLEM 2

Northeast Baptist buys $500,000 of a particular item (at gross prices) from its major supplier,Cardinal Health, which offers NE Baptist terms of 3/20, net 60. Currently, the hospital is paying the supplier the full amount due on Day 60, but it is considering taking the discount, paying on Day 20 and replacing the trade credit with a bank loan that has a 12 percent rate.

a. What is the amount of free trade credit that Baptist obtains from Cardinal Health? (Assume360 days per year throughout this problem.)

b. What is the amount of costly trade credit?

c. What is the approximate annual cost of the costly trade credit?

d. Should Baptist replace its trade credit with the bank loan? Explain your answer.

e. If the bank loan is used, how much of the trade credit should be replaced?