IDIS 424 EXAM 2 VERIFIED STUDY GUIDE
Break Even Analysis Equation - Answers - Net Income = P*X - VC*X - FC
P= average purchase price
X= units produced
VC = variable cost/unit of production
FC = fixed cost of production
Break Even Analysis - Answers - -Identify where revenue equals cost
-Expected profit or loss at different production volumes
TCO - Answers - -purchasing tool, which provides a new
approach for supplier selection
-requires a purchaser to identify and measure cost factors beyond the standard unit
price
-present value of the total costs over life cycle
of the purchased item for evaluating the different supply alternatives
TCO Formula - Answers - PV_j = (C_j)/(1+I)^j
C_j is total cost in year j with I interest rate
TCO = sum of PV_j for all years
Cost Elements in TCO - Answers - -Purchase price
-Acquisition cost
-Usage costs
-End of life costs
Factors to be Considered with TCO - Answers - -Use only for evaluating large
purchases
-Obtain senior management buy in
-Work in a team
-Focus on the big costs first
-Obtain a realistic estimate of the life cycle
Hand to mouth Strategy - Answers - a policy of buying for immediate needs only.
Forward Strategy - Answers - a policy for buying in advance
of the time when the item is actually needed.
Hand to Mouth vs Forward Strategy - Answers - -Hand-to-mouth is advantageous when
prices are
expected to fall.
-Forward buying is advantageous when prices are
, expected to rise.
Mixed Buying - Answers - -Combination of Hand to Mouth and Forward Strategy
-Applicable to cases where the item has predictable seasonal price patterns
-Can lead to significant cost savings due to reduction of purchasing cost and inventory
holding cost
Mixed Buying Equation - Answers - (Yearly Demand/2)*Holding Cost
Deal Buying - Answers - -Sometimes vendors offer occasional price discounts for
promoting their products or clearing excess
inventory.
-The purchase agent needs to decide much more to buy if the discount appears to be
attractive.
-For a time, such purchases will create higher-than normal inventory levels (when would
it be worth?)
Deal Buying Equation - Answers - Q* = ((C-C*)lambda/IC*) + (CQ/C*)
Q* = special order quantity
C* = unit cost after the discount
Q = usual order quantity (before discount)
C = usual unit cost (before discount)
Lamda = annual demand
I = inventory holding cost per year %
Regular Order Quantity Equation - Answers - Q = sqrt ((2*K*lamda)/(I*C))
Q = regular order quantity
Lamda = annual demand
I = inventory holding cost per year %
C = unit cost
K = Cost to prepare order
Purchasing Decisions - Answers - Affect the flow of the supply chain
-Selection of vendor shipping points
-Purchasing quantities
-Timing of the orders
-Transportation method
All Units Discount Model - Answers - Average Annual Cost Function:
G(Q) = (lambda*C) + ((lambda*k)/Q) + (I*C*Q/2)
EOQ Values:
Q = sqrt((2*K*lambda)/I*C)
Break Even Analysis Equation - Answers - Net Income = P*X - VC*X - FC
P= average purchase price
X= units produced
VC = variable cost/unit of production
FC = fixed cost of production
Break Even Analysis - Answers - -Identify where revenue equals cost
-Expected profit or loss at different production volumes
TCO - Answers - -purchasing tool, which provides a new
approach for supplier selection
-requires a purchaser to identify and measure cost factors beyond the standard unit
price
-present value of the total costs over life cycle
of the purchased item for evaluating the different supply alternatives
TCO Formula - Answers - PV_j = (C_j)/(1+I)^j
C_j is total cost in year j with I interest rate
TCO = sum of PV_j for all years
Cost Elements in TCO - Answers - -Purchase price
-Acquisition cost
-Usage costs
-End of life costs
Factors to be Considered with TCO - Answers - -Use only for evaluating large
purchases
-Obtain senior management buy in
-Work in a team
-Focus on the big costs first
-Obtain a realistic estimate of the life cycle
Hand to mouth Strategy - Answers - a policy of buying for immediate needs only.
Forward Strategy - Answers - a policy for buying in advance
of the time when the item is actually needed.
Hand to Mouth vs Forward Strategy - Answers - -Hand-to-mouth is advantageous when
prices are
expected to fall.
-Forward buying is advantageous when prices are
, expected to rise.
Mixed Buying - Answers - -Combination of Hand to Mouth and Forward Strategy
-Applicable to cases where the item has predictable seasonal price patterns
-Can lead to significant cost savings due to reduction of purchasing cost and inventory
holding cost
Mixed Buying Equation - Answers - (Yearly Demand/2)*Holding Cost
Deal Buying - Answers - -Sometimes vendors offer occasional price discounts for
promoting their products or clearing excess
inventory.
-The purchase agent needs to decide much more to buy if the discount appears to be
attractive.
-For a time, such purchases will create higher-than normal inventory levels (when would
it be worth?)
Deal Buying Equation - Answers - Q* = ((C-C*)lambda/IC*) + (CQ/C*)
Q* = special order quantity
C* = unit cost after the discount
Q = usual order quantity (before discount)
C = usual unit cost (before discount)
Lamda = annual demand
I = inventory holding cost per year %
Regular Order Quantity Equation - Answers - Q = sqrt ((2*K*lamda)/(I*C))
Q = regular order quantity
Lamda = annual demand
I = inventory holding cost per year %
C = unit cost
K = Cost to prepare order
Purchasing Decisions - Answers - Affect the flow of the supply chain
-Selection of vendor shipping points
-Purchasing quantities
-Timing of the orders
-Transportation method
All Units Discount Model - Answers - Average Annual Cost Function:
G(Q) = (lambda*C) + ((lambda*k)/Q) + (I*C*Q/2)
EOQ Values:
Q = sqrt((2*K*lambda)/I*C)
