Service Management 7th Edition by James Fitzsimmons, Mona Fitzsimmons

Exercise 19

Spanish Interiors imports ceramic floor tiles from Mexico with various patterns in anticipation of contractor needs. These tiles usually are ordered a year before delivery, and the production run for each tile pattern requires a separate setup. Therefore, the orders must be large to defray the setup cost. Because orders are made far in advance of customer needs, the company must guess what the contractors will like and order patterns in anticipation of these demands. Occasionally, tile patterns fall out of favor, and Spanish Interiors is stuck with slow-moving stock. The markup is 30 percent of the tile cost, and the inventory usually turns over about three times per year. There are two slow-moving tile patterns in stock that management estimates will take 2 years each to clear. The sunburst pattern currently retails for $0.70 per square and the saguaro cactus pattern for $1.05 per square. Calculate the lowest discount price for each pattern that will clear the stock quickly.