Question

Southeastern Bell stocks a certain switch connectorat its central warehouse for supplying field service offices. Theyearly demand for these connectors is 15,000 units. Southeasternestimates its annual holding cost for this item to be $25 per unit.The cost to place and process an order from the supplier is $75.The company operates 300 days per year, and the lead time toreceive an order from the supplier is 2 working days.a) Find the economic order quantity.b) Find the annual holding costs.c) Find the annual ordering costs.d) What is the reorder point?

Answer 1

Answer:

a. 300 units

b. $3,750

c. $3,750

d. 100 units

Explanation:

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

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

= $\sqrt{\frac{2\times \text{15,000}\times \text{\ 75}}{\text{\ 25}}}$

= 300 units

b. For annual holding cost, first we have to find out the average inventory would equal to

= Economic order quantity ÷ 2

= 300 units ÷ 2

= 150 units

Now the Carrying cost = average inventory × carrying cost per unit

= 150 units × $25

= $3,750

c.  For ordering cost, first we have to compute number of orders would be equal to

= Annual demand ÷ economic order quantity

= $15,000 ÷ 300 units

= 50 orders

Now Ordering cost = Number of orders × ordering cost per order

= 50 orders × $75

= $3,750

d. The computation of the reorder point is shown below:

= (Annual demand ÷ total number of days in a year ) × lead time

= (15,000 units ÷ 300 days) × 2 working days

= 100 units