Answered: You are the Chief Financial Officer at…

Managerial Accounting: The Cornerstone of Business Decision-Making

7th Edition

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Chapter12: Capital Investment Decisions

Section: Chapter Questions

Problem 55C

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Question

You are the Chief Financial Officer at Bruins Inc., a leading manufacturer of ice-hockey equipment in North America. The company manufactures a range of products, including composite ice-hockey sticks. The shafts of these composite sticks are made of graphite, Kevlar and polymeric resins. Estimated annual usage of graphite in Bruins Inc’s manufacturing process is 36,000 kilograms. This is used fairly evenly throughout the year other than during August and September. In these periods, production increases to meet demand due to the start of the ice-hockey season in October and to meet demand due to the Christmas holiday in December. Inventory holding costs for graphite are estimated to be $0.75 per kilograms per year. The estimated cost of placing and processing each order of graphite is $27. Throughout the year, it is estimated that graphite will cost an average of $1.60 per kilogram. However, forecast fluctuations in demand mean that the cost of graphite could vary from a maximum of $2.10 per kilogram and a minimum of $1.45 during the year. Bruins Inc. imports graphite from Kunlun Commodities plc, China. Recent disputes with this supplier have led Bruins Inc. to maintain a ‘buffer’ inventory to manage the risk of disruption to this supply. Kunlun Commodities plc offers a 5% bulk purchase discount on orders of graphite of 10,000 kilograms or more. The company’s approach to inventory management was discussed at a recent meeting of Bruins Inc’s senior executive team. Patrice Marchand, Chief Executive at Bruins Inc., is an advocate of just-in-time (JIT) inventories management. Patrice has questioned the company’s current approach to the management of its inventory of graphite and has commented: Holding inventories results in costs for the company. We could avoid these costs if we introduce a JIT approach to the management of our inventory of graphite. Inventory management models and information technology are available to help us. Xiaolin Rask, Chief Operating Officer at Bruins Inc., has pointed out that the successful management of inventories involves a number of practical issues. Xiaolin has commented: Inventory management models and information technology are useful, but I’m sure that there are other issues that we need to consider. I would like to know more about the practical implications of managing inventories.

(a) Calculate the economic order quantity (EOQ) for graphite.

(b) Calculate the total annual cost of graphite.

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