Sharon Ltd has in the past ordered rawmaterial T in quantities of 3,000 units which is half a yearâssupply. Management has instructed you, an inventory costconsultant, to advise them as to the most desired order quantities.The factory closes for 4 weeks annual leave per annum.
You are given the following data:
Inventory usage rate: 125 per week, Lead time: 3 weeks
Unit price: $1.50, Annual requirement: 6,000 units
Order cost: $9.00 per order, Carrying cost: $0.30 per unit peryear Required:
Calculate the economic order quantity.
Calculate the reorder point.
How much would the company save by using this new method?(Assume the order point calculated in part b is used)
Solution:
For Requirement (a) formula is alreadyprovided in lecture slide.
For Requirement (b): Re-Order point =Lead time usage (No of weeks * Usage per week) For Requirement (c):Savings per year by ordering at EOQ (= Existing policy â EOQpolicy) Existing policy = Cost of ordering + Cost of holding +safety stock
Cost of ordering = No of orders perannum * Cost of an order
Cost of holding = Average Inventory *Carrying cost per unit per annum Safety Stock = Usage per week *Lead Time * Carrying cost
EOQ policy = Cost of ordering + Costof holding + Safety stock
For Requirement (c): Savings per yearby ordering at EOQ (= Existing policy â EOQ policy)
Sharon Ltd has in the past ordered rawmaterial T in quantities of 3,000 units which is half a yearâssupply. Management has instructed you, an inventory costconsultant, to advise them as to the most desired order quantities.The factory closes for 4 weeks annual leave per annum.
You are given the following data:
Inventory usage rate: 125 per week, Lead time: 3 weeks
Unit price: $1.50, Annual requirement: 6,000 units
Order cost: $9.00 per order, Carrying cost: $0.30 per unit peryear Required:
Calculate the economic order quantity.
Calculate the reorder point.
How much would the company save by using this new method?(Assume the order point calculated in part b is used)
Solution:
For Requirement (a) formula is alreadyprovided in lecture slide.
For Requirement (b): Re-Order point =Lead time usage (No of weeks * Usage per week) For Requirement (c):Savings per year by ordering at EOQ (= Existing policy â EOQpolicy) Existing policy = Cost of ordering + Cost of holding +safety stock
Cost of ordering = No of orders perannum * Cost of an order
Cost of holding = Average Inventory *Carrying cost per unit per annum Safety Stock = Usage per week *Lead Time * Carrying cost
EOQ policy = Cost of ordering + Costof holding + Safety stock
For Requirement (c): Savings per yearby ordering at EOQ (= Existing policy â EOQ policy)
Related questions
| 20-26 EOQ,uncertainty, safety stock, reorder point. Stewart Corporation is amajor automobile | ||||||||||
| manufacturer. It purchasessteering wheels from Coase Corporation. Annual demand is 10,400steering | ||||||||||
| wheels per year or 200steering wheels per week. The ordering cost is $100 per order. Theannual carrying | ||||||||||
| cost is $13 per steeringwheel. It currently takes 1.5 weeks to supply an order to theassembly plant. | ||||||||||
| 1. What is the optimal numberof steering wheels that Stewartâs managers should order accordingto the | ||||||||||
| EOQ model? | ||||||||||
| 2. At what point shouldmanagers reorder the steering wheels, assuming that both demand andpurchase- | ||||||||||
| order lead time are known withcertainty? | ||||||||||
| 3. Now assume that demand canvary during the 1.5-week purchase-order lead time. The followingtable | ||||||||||
| shows the probabilitydistribution of various demand levels: | ||||||||||
| Total Demand for SteeringWheels fo 1.5 weeks | Probability of Demand (sums to 1) | |||||||||
| 100 | 0.15 | |||||||||
| 200 | 0.2 | |||||||||
| 300 | 0.4 | |||||||||
| 400 | 0.2 | |||||||||
| 500 | 0.05 | |||||||||
| If Stewart runs out of stock,it would have to rush order the steering wheels at an additionalcost of $9 | ||||||||||
| per steering wheel. How muchsafety stock should the assembly plant hold? How will this affectthe | ||||||||||
| reorder point and reorderquantity. | ||||||||||
Given the following information, formulate an inventory management system. The item is demanded 50 weeks a year.
| Item cost | $ | 8.00 | Standard deviation of weekly demand | 20 | per week | |
| Order cost | $ | 223.00 | Lead time | 4 | weeks | |
| Annual holding cost (%) | 28 | % of item cost | Service probability | 99 | % | |
| Annual demand | 27,400 | |||||
| Average demand | 548 | per week | ||||
a. Determine the order quantity and reorder point. (Use Excel's NORMSINV() function to find the correct critical value for the given ?-level. Do not round intermediate calculations. Round "z" value to 2 decimal places and final answer to the nearest whole number.)
| Optimal order quantity 2366 | units | |
| Reorder point | units | |
b. Determine the annual holding and order costs. (Round your answers to 2 decimal places.)
| Holding cost | $2616.32 | |
| Ordering cost | $2615.67 | |
c. Assume a price break of $55 per order was offered for purchase quantities of 2,200 or more units per order. If you took advantage of this price break, how much would you save annually? (Round your answer to 2 decimal places.)
| Annual savings | $ |
Problem 20-15
| Given the following information, formulate an inventory management system. The item is demanded 50 weeks a year. |
| Item cost | $ | 9.00 | Standard deviation of weekly demand | 20 | per week | |
| Order cost | $ | 202.00 | Lead time | 1 | week | |
| Annual holding cost (%) | 28 | % of item cost | Service probability | 90 | % | |
| Annual demand | 24,000 | |||||
| Average demand | 480 | per week | ||||
| a. | Determine the order quantity and reorder point. (Use Excelâs NORMSINV( ) function to find your z-value and then round that z-value to 2 decimal places. Do not round any other intermediate calculations. Round your final answers to the nearest whole number.) |
| Optimal order quantity | units |
| Reorder point | units |
| b. | Determine the annual holding and order costs. (Do not round any intermediate calculations. Round your final answers to 2 decimal places.) |
| Holding cost | $ |
| Ordering cost | $ |
| c. | Assume a price break of $50 per order was offered for purchase quantities of 2,000 units per order. If you took advantage of this price break, how much would you save annually? (Do not round any intermediate calculations (including number of setups per year). Round your final answer to 2 decimal places.) |
| Annual savings | $ |
