Essay on Narragansett Yacht Company

1796 WordsMar 24, 20098 Pages
1. What is the economic order quantity for standard 5-inch winches if they are ordered from (a) Supplier A, and (b) Supplier B? Round your answers up to the next whole unit, because Narragansett cannot order a fraction of a winch. EOQ = square root of ( 2 x R x A) V x W R = annual demand is 1500 units A = ordering cost is $1,000 for Supplier A and $500 for Supplier B V = cost per unit is $300 W = carrying cost percentage is 23% Supplier A: EOQ = Square root of (2 x 1500 x $1,000) = S.R. of 3,000,000 = 209 ($300 x 23%) 69 Supplier B: EOQ = Square root of (2 x 1500 x $500) =…show more content…
Compute this figure for Supplier A and Supplier B. Days till shutdown = Reorder Points / Daily Usage Supplier A: 117 / (1500/360) = 29 Days Supplier B: 234 / (1500/360) = 57 Days 6. The cost of carrying inventories has been calculated using the current cost of bank loans (see Table 2). Do you think this is the appropriate rate? Explain, and in your answer consider both WACC and tax effects. Yes, In considering the WACC since inventory ties up money that could be used elsewhere, capital costs are one of the biggest factors in determine carrying cost, and in considering the interest expense it can be written off for tax purposes. Inventory is also constant throughout the year because usage is uniform throughout the year. The rate given is a long term bank rate which is best for constant production. The usage is uniform because production is constant instead of seasonal. If the production is seasonal, short term bank rates are more attractive. 7. Narragansett’s production is relatively constant throughout the year, but if its sales production were highly seasonal, could the EOQ model still be used? If so, would modifications be required? Explain. Yes, the EOQ model can still be used. But, you would have to adjust for seasonal variations in inventory. ie ' You would find the EOQ

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