CASE STUDY 1
Wagner Fabricating Company
Managers at Wagner Fabricating Company are reviewing the economic feasibility of
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 average
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
An analysis of the purchasing operation shows that approximately two hours are required to
process and coordinate an order for the part regardless of the quantity ordered. Purchasing
salaries average $28 per hour, including employee benefits. In addition, a detailed analysis of
125 orders showed that $2375 was spent on telephone, paper, and postage directly related to the
A one-week lead time is required to obtain the part from the supplier. An analysis of demand
during the lead time shows it is approximately normally distributed with a mean of 64 units and a
standard deviation of 10 units. Service level guidelines indicate that one stock-out per year is
Currently, the company has a contract to purchase the part from a supplier at a cost of $18 per
unit. However, over the past few months, the company’s production capacity has been expanded.