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C10 CASES 12ed - Case Problem 1 WAGNER FABRICATING COMPANY...

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Case Problem 1 WAGNER FABRICATING COMPANY Managers at Wagner Fabricating Company are reviewing the economic feasibility of manu- facturing a part that it 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 and lighting. An analysis of the purchasing operation shows that approximately two hours are re- quired 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 de- tailed analysis of 125 orders showed that $2375 was spent on telephone, paper, and postage directly related to the ordering process. 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 acceptable. 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. As a result, excess capacity is now available in certain production depart-
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