Summary of the Case
Maddux has established two game program suppliers, one local and another one in a different town. He is faced with a decision on which one to pick with their different cost for printing programs and the cost involved in delivery of programs to the university. Another challenge he is facing is whether carrying inventory will be economical for the university. Maddux is pressured to keep the costs of the game programs low and maximize profits.
The stadium is expected to have an attendance of 60,000, which is dependent on the team performance and the opponent the team is playing. Further, two of every three people buy the program. The costs of buying on the per-game basis and carrying inventory are analyzed below.
Analysis
The first option available is to acquire services of Sam Taylor of Quality Printing, in Stephenville. This is a local company hence no transport costs are expected. Sam offers the following discounts:
Programs
0 to 30,000 $ 1.80 ea.
30,000 to 60,000 $ 1.70 ea.
60,000 to 250,000 $ 1.60 ea.
250,000 and up $ 1.40 ea.
Per-game Basis
=40,000
Cost for all Five games= (40,000*$1.7)*5=$340,000
Cost of acquiring these programs will include the ordering/check-writing cost, which is $100
The annual cost of buying the programs on the per-game basis is $340,100.
Inventory Keeping
Inventory carrying cost Carrying cost is 50%
The number of programs per year is 200,000 programs.
Annual cost =320,000+160,000+100 =$480,000
The second option is a SWU alumnus who is offering the same services at 10% less. However, he is situated in Ft. Worth where the university will incur a cost of $200 for every trip made to get the printed programs.
0 to 30,000 $ 1.62 ea.
30,000 to 60,000 $ 1.53 ea.
60,000 to 250,000 $1.44 ea.
250,000 and up $ 1.26 ea
Buying For Each Game
{(40,000*1.53)+200}*5 + 100=306,000+1000+100=$316,100
The cost for buying programs for each game is $316,100
Carrying Inventory
(200,000*1.44)=288,000
288,000+144,000+100+200=$432,300
The cost of keeping inventory for the whole year is $432,300
In calculating these figures, it is assumed that ordering/check-writing cost per year is $100.
Conclusion
Recommendations
Inventory holding cost is very high because there is no proper facility to keep the programs. The university should establish the cost of building such a facility, which will reduce inventory carrying cost hence making it cheaper to keep inventory, as opposed to ordering programs for each game.
I concur with the decision to order programs for each game separately because it allows management to track the performance of the team. Hence enabling Maddux to anticipate the demand for programs.
