Case Problem 1 WAGNER FABRICATING COMPANY Managers at Wagner Fabricating Company are reviewing the economic feasibility of man- ufacturing a part 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 aver- age 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502 Chapter 10. verry Medes jows that approximately to hours, operation sh ae cdless of the quanti nate an order forthe part regar uantity ond, rng per hour, incluing employee benefits. In addition, ge ea that $2575 was spent on telephone, pape, an rocess. edo obtain the'pat from the supplier: An analysis proximately normally distributed with ner ‘Service level guidelines indicate thy So andar devon of 1008 Se use a se cn nn utilization of equipment shows that production capacity will be available ford nea lng edrel-The rucion capaci available athe rat of 100 uns renee pinup tive noms ofproduton ime availble, Management Belees ar with a two-week lead time, schedules can be arranged so that the part can be produced eso med. The Jomand daring te two-wek ead tine approximately noma distributed, with a mean of 128 units and a standard deviation of 20 units. Production costs ‘xeon of managements that stp cos wile substantial Tet os of ke ands production nes extnatd tbe $50 per hour, anda fl egh-howr sit wile ‘needed to set up the equipment for producing the part. Managerial Report Develop report for management of Wagner Fabricating that will address the question of ‘whether the company should continue o purchase the part from the supplier or begin produce the par itself. Include the following factors in your report: |. An analysis of the holding costs, including the appropriate annual holding cos 2. An analysis of ordering costs, including the appropriate cost per order from the supplier 43. Am analysis of setup costs for the production operation 4. Adevelopment ofthe inventory policy for the following two alternatives: 1. Ordering a fixed quantity Q from the supplier b. Ordering a fixed quamtty 0 from in-plant production 5. Include the following in the policies of parts 4(a) and 4(h): a. Optimal quantity Q* Number of order or production runs per year Cycle time Reorder point Amount of safety stock Expected maximum inventory ‘Average inventory Annual holding cost Annual ordering cost Annual cost ofthe units purchased or manufacturedk. Total annual cost of the purchase policy and the total annual cost of the produc- tion policy 6. Make a recommendation as to whether the company should purchase or manufac- ture the part. What savings are associated with your recommendation as compared with the other alternative?