Winfield Distribution Company

WinfieldDistribution Company

WinfieldDistribution Company

Inthe present case, operates at a servicelevel of 80 %. The company has a mean demand 170 trimmers and astandard deviation of 60 trimmers during the lead time. The annualcarrying cost of each trimmer is $ 6. It is estimated that thecompany could earn additional $ 400 by increasing the service levelfrom 80 % to 90 %. The decision on whether the Winfield should orshould not increase the service should be based on several factors(such as changes in carrying cost), other than the additional profitsassociated with changes in the level of service.

Computationfor changes in the carrying cost

Carryingcost at 80 % service level

Conservativeestimate of trimmer’s demand

=means demand of trimmers during the lead time + standard deviationduring the lead time

=170 trimmers + 60 trimmers

=230 trimmers

Thenumber of trimmers to be held at the service level of 80 %

=Conservative estimate of trimmer’s demand * inventory level

=230 trimmers * 0.8

=184 trimmers

Totalcarrying cost at 80 % service level

=The number of trimmers to be held at the service level of 80 % *annual carrying cost per trimmer

=184 trimmers * $ 6

=$ 1,104

Carryingcost at 99 % service level

Thenumber of trimmers to be held at the service level of 80 %

=Conservative estimate of trimmer’s demand * inventory level

=230 * 0.99

=227.7

Totalcarrying cost at 99 % service level

=The number of trimmers to be held at the service level of 80 % *annual carrying cost per trimmer

=$ 228 trimmers * $ 6

=$ 1,368

Therefore,changes in carrying cost = $ 1,368 – $ 1,104

=$ 264

Thechange in carrying cost is less than the expected increase inprofits, which is $ 400.

Althoughthe carrying cost increase at a lower rate compared to the expectedincrease in profits, holding a higher level of inventory isunfavorable because it ties up funds that should be used to financeother operations (Gitman, 2006). Therefore, Winfield should avoidmaking the change in the level of inventory.

Reference

Gitman,J. (2006). Introductionto Managerial Finance.New York, NY: Pearson Education.