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Homework answers / question archive / The Burdell Wheel and Tire Company assembles tires to wheel rims for use on cars during manufacture of vehicles by the automotive industry
The Burdell Wheel and Tire Company assembles tires to wheel rims for use on cars during manufacture of vehicles by the automotive industry. Burdell wants to locate a low-cost supplier for the tires he uses in his assembly operation. The supplier will be selected based on total annual cost to supply Burdell's needs. Burdell's annual requirements are for 25,000 tires, and the company operates 250 days a year. The following data are available for two suppliers being considered.
| SUPPLIER | SHIPPING QUANTITY PER SHIPMENT | SHIPPING COSTS | PRICE / TIRE (p) | INVENTORY HOLD COSTS (H) | LEAD TIME (DAYS) | ADMIN. COSTS |
|---|---|---|---|---|---|---|
| LEXINGTON TIRE | 2,000 | $18,000 | $30 | $6.00 | 6 | $15,000 |
| IRMO AUTO | 1,000 | $25,000 | $29 | $5.80 | 4 | $18,000 |
Using the Total Cost Analysis for Supplier Selection, which supplier should Burdell choose? Provide details to justify your answer.
Annual requirement of burdell = 25,000 tires
The company operates= 250 days
Daily requirement = 25,000 tires / 250 days = 100 tires/ day
Frequency of supply, average inventory and annual inventory holding cost:
Frequency of supply from Lexington tire = Shipping quantity / Daily requirement = 2000 / 100 = 20days
Frequency of supply from Irmo auto = shipping quantity / daily requirement = 1000 / 100 = 10 days
Hence, on every 20th day stock of supply from Lexington tire goes from 2000 to 0 and this continues throughout the year. Thus, the average stock =2000 / 2 = 1000
Now,
the annual inventory holding cost for supply fromLexington tire = Annual holding cost per unit * average inventory
= 6 * 1000
= 6,000
On on every 20th day stock of supply from Lexington tire goes down from 2000 to 0 and this continues throughout the year. Thus, the average stock =2000 / 2 = 1000
Now,
the annual inventory holding cost for supply fromLexington tire = Annual holding cost per unit * average inventory
= 6 * 1000
= 6,000
On every 10th day stock of supply from Irmo tire goes down from 1000 to 0 and this continues throughout the year. Thus, the average stock =1000 / 2 = 500
Now,
the annual inventory holding cost for supply from Irmo tire = Annual holding cost per unit * average inventory
= 5.80 * 500
= 2,900
Total price payable for full supply of 25,000 tires:
Total price payable to Lexington tire = Price per unit * 25,000 tires = 6 * 25,000 = 150,000
Total price payable to Irmo tire = Price per unit * 25,000 tires = 5.80 * 25,000 = 145,000
| Comparative table for total cost analysis: | |||||
|---|---|---|---|---|---|
| Supplier | Annual Shipping Cost ($) | Total price ($) | Annual Inventory Holding cost ($) | Annual administrative cost ($) | Total cost ($) |
| Lexington tire | 18,000 | 150,000 | 6,000 | 15,000 | 189,000 |
| Irmo auto | 25,000 | 145,000 | 2,900 | 18,000 | 190,900 |
On the basis of the analysis given above:
The total cost incurred with Lexington tire < Total cost incurred with Irmo auto
Thus, Lexington tire must be chosen.
