An inventory, mostly made up of machined parts, consisted of 6000 SKUs valued (at full cost) by the accounting department at $420,000. The company had recently built a new warehouse at a cost of $185,000 that was financed through a 12% mortgage. The building was to be depreciated on a 25-year basis. The company’s credit rating was sound, and a bank loan of $50,000 was under negotiation with the bank. The main operating costs per year in the new warehouse were estimated to be as follows: p-945

It was estimated that on average, each SKU involved one dollar of labor cost per dollar of material cost.

a. Recommend a value for the carrying cost r in $/$/year.

b. Suppose that your recommended value for r is accepted by the management and the accounting department. You proceed to calculate the economic order quantities for all 6000 items and discover that the new warehouse is too small to physically accommodate all the inventory that is indicated by your calculations. What action would you take now?

c. Alternatively suppose that your recommended value for r is accepted by the management and the accounting department, but that the total dollar investment (based on economic order quantities) that you estimate will be needed is approximately $800,000.
The top management is unwilling to have a total investment greater than $500,000.
What action would you take under such a circumstance?

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Municipal and other taxes Insurance on building and contents Heating/air conditioning $5,732.67 3,200.00 12,500.00 Electricity and water 3,200.00 Labor (supervisor, three clerks, and a half-time janitor) 69,000.00 Pilferage 5,000.00 Obsolescence 5,000.00 Total $103,632.67 * Includes 60% manufacturing overhead.