Question

A company begins a review of ordering policies for its continuous review system by checking the current policies for a sample of SKUs Following are the characteristics of one item. Refer to the standard normal table for z-values. Demand (D) = 110 units/week (Assume 48 weeks per year) Ordering and setup cost (S) = $45/order Holding cost (H) = $14.00/unit/year Lead time (L) = 3 weeks Standard deviation of weekly demand = 21 units Cycle-service level = 90 percent
a. What is the EOQ for this item? units. (Enter your response rounded to the nearest whole number.)
b. What is the desired safety stock? units. (Enter your response rounded to the nearest whole number.)
c. What is the reorder point? units. (Enter your response rounded to the nearest whole number.)
d. What are the cost implications if the current policy for this item is Q = 300 and R = 370? The annual ordering cost is $ (enter your response rounded to two decimal places) and the annual holding cost is $

Answer 1

Answer:

a. The EOQ for this item is 184 units

b. The desired safety stock is 47 units

c. The reorder point is 377 units.

d.  Holding co is 1,288.

The Ordering co isst 1,291

Explanation:

According to the given data we have the following:

Annual Demand (d) = 48*110 = 5280 units

a) Therefore,  EOQ = sqrt(2*D*S/H) = sqrt(2*5280*45/14) = 184 units

b) Safety Stock = Z*SD*sqrt(LT)

For Service level of 90%, Z value is 1.28

SD = 21

Lead Time (LT) = 3

Therefore, Safety Stock = 1.28*21*sqrt(3) = 47 units

c) Reorder point is D*LT + Z*SD*sqrt(LT)

= 110*3 + 47 = 377 units

d) If currently Q = 300, R = 370

Holding cost = Q/2*H = 300/2*14 = 2100$

Ordering cost = D/Q*S = 5280/300*45 = 792$

Total = 2,892$

For Q=EOQ=184 & R = 377

Holding cost = 184/2*14 = 1,288

Ordering cost = 5280/184*45 = 1,291

Total = 2,579$