The cost penalties incurred by firms holding too much or too little inventory. Introduction: Inventory management is heavily essential for the profitability of the organization. When the inventory is not managed efficiently, there are problems which arise, these are explained in terms of costs.

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Chapter 4.4, Problem 2P

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To determine: The cost penalties incurred by firms holding too much or too little inventory.

Introduction: Inventory management is heavily essential for the profitability of the organization. When the inventory is not managed efficiently, there are problems which arise, these are explained in terms of costs.

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Discuss the cost penalties incurred by a firm that holds too much inventory andone that holds too little inventory

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One of your Taiwanese suppliers has bid on a new line of molded plastic parts that is currently being assembled at your plant. The supplier has bid $0.10 per part, given a forecast you provided of 300,000 parts in year 1; 500,000 in year 2; and 700,000 in year 3. Shipping and handling of parts from the supplier's factory is estimated at $0.03 per unit. Additional inventory handling charges should amount to $0.004 per unit. Finally, administrative costs are estimated at $20 per month. Although your plant is able to continue producing the part, the plant would need to invest in another molding machine, which would cost $10,000. Direct materials can be purchased for $0.04 per unit. Direct labor is estimated at $0.05 per unit for wages plus a 50 percent surcharge for benefits and, indirect labor is estimated at $0.013 per unit plus 50 percent benefits. Up-front engineering and design costs will amount to $40,000. Finally, management has insisted that overhead be allocated if the parts are…