Question 1:

Phillips Corporation is a major manufacturer of food processors. It purchases motors from Viking Corporation. Annual demand is 52,000 motors per year or 1,000 motors per week. The ordering cost is $360 per order. The annual carrying cost is $6.50 per motor. It currently takes 2 weeks to supply an order to the assembly plant.

Required:

1. What is the optimal number of motors that Phillipss managers should order according to the EOQ model?

2. At what point should managers reorder the motors, assuming that both demand and purchase-order lead time are known with certainty?

3. Now assume that demand can vary during the 2-week purchase-order lead time. The following table shows the probability distribution of various demand levels:

Total Demand for motors for 2 weeks	Probability of demand (sum to 1)
1,600	0.05
1,800	0.20
2,000	0.50
2,200	0.20
2,400	0.05

If Phillips runs out of stock, it would have to rush order the motors at an additional cost of $5 per motor. How much safety stock should the assembly plant hold? How will this affect the reorder point and reorder quantity?

Question 2:

Supply-chain effects on total relevant inventory cost. ClearPic Television Co. outsources the production of picture-tubes for its televisions. It is currently deciding which of two suppliers to use: X or Y. Due to differences in the product failure rates in the two companies, 7.5% of picture-tubes purchased from X will be inspected and 20% of picture-tubes purchased from Y will be inspected. The following data refer to costs associated with X and Y:

	X	Y
Number of orders per year	60	60
Annual picture-tubes demanded	12,000	12,000
Price per picture-tube	$98	$96
Ordering cost per order	$15	$12
Inspection cost per unit	$5	$5
Average inventory level	150	150
Expected number of stockouts	120	270
Stockout cost (cost of rush order) per stockout	$5	$7
Units returned by customers for replacing picture-tubes	80	600
Cost of replacing each picture-tube	$25	$25
Required annual return on investment	12%	12%
Other carrying cost per unit per year	$5.00	$5.00

Required

1. What is the relevant cost of purchasing from X and Y?

2. What factors other than cost should ClearPic consider?