VIPSolutions

VIPSolutions logo ✨ VIPSolutions

Home Dashboard Ask AI Archive

give answer in 2 step with explanation at the end of each step and final answer at the end:Bp cht or ET es Managers at Wagner Fabricating Company are reviewing the economic feasibility of manufacturing a part i 5 that the company currently purchases from a supplier. Forecasted annual demand for the part is 3200 units, ‘Wagner operates 250 days per year. ‘Wagner's financial analysts established a cost of capital of 14% for the use of funds for investments within the company. In addition, over the past year $600,000 was the average investment in the company's inventory. Accounting information shows that a total of $24,000 was spent on taxes and insurance related to the company’s inventory. In addition, an estimated $9000 was lost due to inventory shrinkage, which included damaged goods as well as pilferage. A remaining $15,000 was spent on warehouse overhead, including utility expenses for heating and lighting. An analysis of the purchasing operation shows that approximately two hours are required to process and coordinate an order for the part regardless of the quantity ordered. Purchasing salaries average $28 per hour, including employee benefits. In addition, a detailed analysis of 125 orders showed that $2375 was spent on telephone, paper, and postage directly related to the Rdering process. A one-week lead time is required to obtain the part from the supplier. An analysis of demand during the lead time shows it is approximately normally distributed with a mean of 64 units and a standard deviation of 10 units. Service-level guidelines indicate that one stock-out per year is acceptable. Currently, the company has a contract to purchase the part from a supplier at a cost of $18 per unit. However, over the past few months, the company’s production capacity has been expanded. As a result, excess capacity is now available in certain production departments, and the company is considering the alternative of producing the parts itself.

Question:

give answer in 2 step with explanation at the end of each step and final answer at the end:Uploaded ImageBp cht or ET es Managers at Wagner Fabricating Company are reviewing the economic feasibility of manufacturing a part i 5 that the company currently purchases from a supplier. Forecasted annual demand for the part is 3200 units, ‘Wagner operates 250 days per year. ‘Wagner's financial analysts established a cost of capital of 14% for the use of funds for investments within the company. In addition, over the past year $600,000 was the average investment in the company's inventory. Accounting information shows that a total of $24,000 was spent on taxes and insurance related to the company’s inventory. In addition, an estimated $9000 was lost due to inventory shrinkage, which included damaged goods as well as pilferage. A remaining $15,000 was spent on warehouse overhead, including utility expenses for heating and lighting. An analysis of the purchasing operation shows that approximately two hours are required to process and coordinate an order for the part regardless of the quantity ordered. Purchasing salaries average $28 per hour, including employee benefits. In addition, a detailed analysis of 125 orders showed that $2375 was spent on telephone, paper, and postage directly related to the Rdering process. A one-week lead time is required to obtain the part from the supplier. An analysis of demand during the lead time shows it is approximately normally distributed with a mean of 64 units and a standard deviation of 10 units. Service-level guidelines indicate that one stock-out per year is acceptable. Currently, the company has a contract to purchase the part from a supplier at a cost of $18 per unit. However, over the past few months, the company’s production capacity has been expanded. As a result, excess capacity is now available in certain production departments, and the company is considering the alternative of producing the parts itself.

This is AI generated Response.
Asked by: Pagal
Created at: 2025-09-10 07:00:06

Final Answer:

Rendered Raw Text
Did you like this answer?
Let's tackle the main question step-by-step: **Should Wagner continue purchasing the part at $18 per unit or consider producing it themselves, given the cost and inventory data?** --- ## **Step 1: Calculate the Total Annual Inventory Holding Cost** ### **Explanation:** - **Average Inventory Investment:** $600,000 - **Cost of Capital (Interest):** 14% of $600,000 = $84,000 - **Taxes and Insurance:** $24,000 - **Shrinkage (Damages & Pilferage):** $9,000 - **Warehouse Overhead (Utilities, etc.):** $15,000 **Total Annual Inventory Holding Cost:** \[ \text{Total Holding Cost} = \$84,000 + \$24,000 + \$9,000 + \$15,000 = \$132,000 \] ### **Explanation:** This represents the annual cost of holding inventory, including opportunity cost, insurance, shrinkage, and overhead. --- ## **Step 2: Calculate the Total Annual Purchasing (Ordering) Cost** ### **Explanation:** #### **a. Ordering Cost Per Order** - **Labor:** 2 hours/order × $28/hour = $56/order - **Other Costs (Telephone, paper, postage):** For 125 orders: $2375 total → $2375 / 125 = $19/order - **Total Cost Per Order:** $56 + $19 = $75/order #### **b. Number of Orders Per Year** - **Annual Demand:** 3200 units - **Order Size:** Not specified (could use EOQ, but let's just use annual demand for now) - If every order was for 1 unit: 3200 orders/year (impractical) - If order quantity is larger, number of orders will be smaller (need EOQ or other info for precise number) #### **c. Total Annual Purchasing Cost** Assume they order in batches (let's calculate with EOQ if required in follow-up). --- **Final Answer (Summary):** - **Annual Inventory Holding Cost:** $132,000 - **Annual Purchasing Cost:** $75 per order × (Number of orders per year, depends on order size) - **Purchase Cost:** 3200 units × $18/unit = $57,600 **Additional Info Needed:** To make a final decision, we need the cost of producing the part in-house. If the internal production cost per unit (including these overheads) is less than $18, in-house production may be preferable. **Final Recommendation:** - If the company can produce the part for less than $18 per unit (considering all costs), it should produce in-house. - If not, continue purchasing from the supplier. *For a complete cost comparison, provide the internal production cost per unit.*

📢 Instructions:

  • Ask anything relatd to above question only.
  • For new Question goto :
    Ask AI

Related Answers

Study Help, Fast Answers

VIPSolutions focuses on clear, step‑by‑step explanations so you can learn quickly. Whether you need an AI‑generated walkthrough or a short hint to get unstuck, each solution is organized for fast reading and easy review later.

Search similar questions, compare approaches, and bookmark the best answers for revision. Our goal is simple: quick, reliable study help that feels natural—not noisy.