Question

A toy manufacturer uses approximately 32,000 silicon chips annually. The chips are used at a steady rate during the 240 days a year that the plant operates. Annual holding cost is $3 per chip and ordering cost is $120. Determine by hand:
a) The optimal order quantity

b) The number of orders to be placed in a year

c) How often orders need to be placed?

d) Compute the total annual cost using your order size from question a.

Answer 1

Answer:

a) 1,600

b) 20

C) every 18.25 days

d) 4,800 dollars

Explanation:

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

Where:

D = annual demand = 32,000 units

S= setup cost = ordering cost = $120

H= Holding Cost = $3.00

$Q_{opt} = \sqrt{\frac{2(32,000)(120)}{3}}$

EOQ = 1600

orders per year:

32,000 / 1,600 = 20 order per year

days between orders:

365 days per year / 20 order per year = 18.25 days

inventory cost:

average inventory: 1,600 / 2 = 800 units of inventory

800 x $3 holding cost + 20 orders at $120 each

2,400 + 2,400 = 4,800