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Paul Akili, an aggressive entrepreneur, is working on some make – or – buy decisions and a related inventory system. For one such product, he decides...

      

Paul Akili, an aggressive entrepreneur, is working on some make – or – buy decisions and a
related inventory system. For one such product, he decides to use the classic economic – lot
– size model with no stockouts to determine an optimal order quantity. He initially
predicts that annual demand will be 2000 units, that each unit will cost sh.2,565, that the
incremental cost of processing each order (and receiving the ordered goods) will be Sh.3,819
in this case, and the incremental cost of storage will be sh.342 per physical unit per year.
Assume that the inventory cycle precisely repeats every year.
Required:
a) What is the optimal order quantity?
b) What are the total relevant costs of inventory from following your policy in (a) above?
c) Suppose that Paul Akili is incorrect in his sh.3,819 incremental – costs – per order
prediction but is precisely correct in all other predictions.
State and solve the equation to predict the maximum amount Paul Akili should pay to
discover the true incremental cost per order if:
(i) This true costs is sh.1,881 per order and
(ii) In the absence of any knowledge to the contrary, Paul Akili implement the
solutions in (a) above and will not alter it for one full year.
a) What happens t your answer in (c) above if we admit that Paul Akili has also made
errors in predicting demand price and the cost of storage?
d) Suppose Paul Akili implements the solution in (a) above for two years.
e) Further supposes that all of his initial predictions were, and are, correct except that the
actual incremental cost of storage is sh.1,140 per average unit.
If it costs Akili a total of sh.228 to alter his inventory policy, state the equation to
determine the cost of prediction error of not changing his inventory policy at the
beginning of the second year.

  

Answers


Kavungya
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Kavungya answered the question on May 8, 2021 at 13:43


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    Date posted: May 8, 2021.  Answers (1)

  • Siku Kuu Ltd. Manufactures and distributes a line of Christmas gifts. The company had neglected to keep its gifts line current. As a result, sales have...(Solved)

    Siku Kuu Ltd. Manufactures and distributes a line of Christmas gifts. The company had
    neglected to keep its gifts line current. As a result, sales have decreased to approximately 25,000
    units per year fro a previous high of 125,000 units. The gifts have been redesigned recently and
    is considered by company officials to be comparable to its competitors‟ models.
    The company plans to redesign the gifts each year in order to compete effectively. Kama
    Kawaida, the Sales Manager, is not sure how many units can be sold next year, but she is willing
    to place probabilities on her estimates. Kama Kawaida's estimates of the number of
    units that can be sold during the next year and the related probabilities are as follows:
    fig985245.png
    Required:
    a) Prepare a payoff table for the different sizes of production runs required to meet the four
    sales estimates prepared by Kama Kawaida for Siku Kuu Ltd.
    If Siku Kuu Ltd. relied solely on the expected monetary value approach to make
    decisions, what size of production run would be selected?
    b) Identify the seven basic steps that are taken in any decision process. Explain each step by
    reference to the situation presented by Siku Kuu Ltd. and your answer to requirement (a)

    Date posted: May 8, 2021.  Answers (1)