Question

Westside Auto purchases a component used in the manufacture of automobile generators directly from the supplier. Westside’s generator production operation, which is operated at a constant rate, will require 1000 components per month throughout the year (12,000 units annually). Assume that the ordering costs are $25 per order, the unit cost is $2.50 per component, and annual holding costs are 20% of the value of the inventory. Westside has 250 working days per year and a lead time of 5 days. Answer the following inventory policy questions:A. What is the EOQ for this component?
B. What is the reorder point?
C. What is the cycle time?
D. What are the total annually holding and ordering costs associated with your recommended EOQ?

Answer 1

Answer:

EOQ = 1,095 units

Reorder point: 240 units (at this point the company must do an order to about stock-out)

Cycle time:  33 days (each order last 33 days)

Inventory  cost:

ordering cost: 12,000 / 1,095.44  x $25 per order = $ 273.86

holding cost: 1,095.44 /2 x 0.5 =  $273.86

Total: 273.86 + 273.86 = $547.52

Explanation:

Economic Order Quantity:

$Q_{opt} = \sqrt{\frac{2DS}{H}}$

D = annual demand =12,000

S= setup cost = ordering cost = 25

H= Holding Cost = 0.50

$Q_{opt} = \sqrt{\frac{2(12,000)(25)}{0.5}}$

EOQ = 1,095.44

Demand per day: 12,000 / 250 days = 48

Reorder point: 48 units per day x 5 days lead time = 240

Cycle time: the time it takes between orders:

365 /(12,000 / 1,095.44) =  33.3197 = 33 days

total cost:

ordering cost: 12,000 / 1,095.44  x $25 per order = $ 273.86

holding cost: 1,095.44 /2 x 0.5 =  $273.86

Total: 273.86 + 273.86 = $547.52