QUESTION 1 Chris is a trader who buys and sells Scottish whisky around the world. Every year, Chris sells 100,000 bottles of whisky at a price of 50 per bottle. Currently, Chris buys all his whisky from the Kintra Distillery on Islay. Kintra whisky has a very distinct flavour, and it is has won many awards for its quality. Chris has been buying his whisky from Kintra for 20 years, and has close family ties with the Master Distiller. Chris pays 27.50 per bottle from the distillery. For each order he places, Chris incurs a delivery charge of 2,500, as well as an administrative charge of 500. At present, Chris stores his whisky in a warehouse in Glasgow. The warehouse charges Chris 0.50 per bottle per month to hold his inventory. Chris has recently been contacted by a new supplier of whisky on Islay, Machrie Whiskies. The distillery is 100% sustainable, and uses only renewable energies to power its operations. The new distillery has just begun to sell whisky and is not yet established on the market as a major brand. As such, it is not yet known how much the whisky will sell for. Optimistic estimates by whisky experts suggest that the whisky will sell for 55 per bottle in its first year, but this could rise significantly in future if the brand is sought after by collectors. However, more cautious estimates suggest that Machrie whisky may sell for just 35 in its first year. Machrie Whiskies is offering Chris a price of 22 per bottle on orders, provided he chooses them as his sole supplier and continues to order 100,000 bottles per year. Chris will continue to incur a 500 administrative charge for each order he places, however his delivery costs will reduce to 1,500 per order as the shipping route from Machrie to Glasgow is shorter than the route Chris currently ships his Kintra whisky. Chris will continue to store the whisky in the same Glasgow warehouse, but he has been offered a significantly reduced holding cost per bottle of 2.56 per year. N.B. Sales and inventories are generated and consumed evenly throughout the period. The average balance in inventory is equal to half of the order quantity. REQUIRED: 1.1. Calculate the Economic Order Quantity (EOQ) and annual profit or loss for Chris's current agreement with Kintre Distilleries. Assume Chris orders the EOQ. 1.2. Calculate the Economic Order Quantity (EOQ) and annual profit or loss if Chris chooses to switch suppliers to Machrie Whiskies at both of the estimated sales prices. Assume Chris orders the EOQ. 1.3. Recommend whether Chris should accept or reject the offer to switch to the new supplier Maximum Word Count: 750 QUESTION 1 Chris is a trader who buys and sells Scottish whisky around the world. Every year, Chris sells 100,000 bottles of whisky at a price of 50 per bottle. Currently, Chris buys all his whisky from the Kintra Distillery on Islay. Kintra whisky has a very distinct flavour, and it is has won many awards for its quality. Chris has been buying his whisky from Kintra for 20 years, and has close family ties with the Master Distiller. Chris pays 27.50 per bottle from the distillery. For each order he places, Chris incurs a delivery charge of 2,500, as well as an administrative charge of 500. At present, Chris stores his whisky in a warehouse in Glasgow. The warehouse charges Chris 0.50 per bottle per month to hold his inventory. Chris has recently been contacted by a new supplier of whisky on Islay, Machrie Whiskies. The distillery is 100% sustainable, and uses only renewable energies to power its operations. The new distillery has just begun to sell whisky and is not yet established on the market as a major brand. As such, it is not yet known how much the whisky will sell for. Optimistic estimates by whisky experts suggest that the whisky will sell for 55 per bottle in its first year, but this could rise significantly in future if the brand is sought after by collectors. However, more cautious estimates suggest that Machrie whisky may sell for just 35 in its first year. Machrie Whiskies is offering Chris a price of 22 per bottle on orders, provided he chooses them as his sole supplier and continues to order 100,000 bottles per year. Chris will continue to incur a 500 administrative charge for each order he places, however his delivery costs will reduce to 1,500 per order as the shipping route from Machrie to Glasgow is shorter than the route Chris currently ships his Kintra whisky. Chris will continue to store the whisky in the same Glasgow warehouse, but he has been offered a significantly reduced holding cost per bottle of 2.56 per year. N.B. Sales and inventories are generated and consumed evenly throughout the period. The average balance in inventory is equal to half of the order quantity. REQUIRED: 1.1. Calculate the Economic Order Quantity (EOQ) and annual profit or loss for Chris's current agreement with Kintre Distilleries. Assume Chris orders the EOQ. 1.2. Calculate the Economic Order Quantity (EOQ) and annual profit or loss if Chris chooses to switch suppliers to Machrie Whiskies at both of the estimated sales prices. Assume Chris orders the EOQ. 1.3. Recommend whether Chris should accept or reject the offer to switch to the new supplier Maximum Word Count: 750
