Question

A company uses 2,500 per year of a certain subassembly that has an annual holding cost of $40 per unit. Each order placed costs $150. The company operates 250 days per year and it has found that an order must be placed with the supplier 5 working days before it can expect to receive that order. For this subassembly, find: (a) the economic order quantity (Round answer to nearest whole number). (b) the annual holding cost. (c) the annual ordering cost. (d) the reorder point.

Answer 1

Answer:

a. 136.93 units

b. $2,783.60

c. $2,783.63

d. 60 units

Explanation:

a. The computation of the economic order quantity is shown below:

$= \sqrt{\frac{2\times \text{Annual demand}\times \text{Ordering cost}}{\text{Carrying cost}}}$

$= \sqrt{\frac{2\times \text{2,500}\times \text{\ 150}}{\text{\ 40}}}$

= 136.93 units

b. The annual holding cost is

= Economic order quantity ÷ 2  × holding cost per order

= 136.93 units ÷ 2 × $40

= $2,738.60

c. The annual ordering cost is

= Annual demand ÷ economic order quantity  × ordering cost per order

= $2,500 ÷ 136.93 units  × $150

= $2,738.63

d. The reorder point is

= Demand × lead time + safety stock

where, Demand equal to

= Expected demand ÷ total number of days in a year

= 2,500 ÷ 250 days

= 10

So, the reorder point would be  

= 10 × 6 + $0

= 60 units

We simply applied the above formulas