Question

Clancy's Motors has the following demand to meet for custom manufactured fuel injector parts. The holding cost for that item is $0.75 per month and each setup costs $150. Lead-time is 0 months. Calculate the planned order releases using: (a) the EOQ technique, and (b) the POQ technique, (c) the lot-for-lot technique. What are the costs of each plan, including the holding cost of any inventory left over after month 7? Show POM-QM results.

Answer 1

Answer:

a) EOQ ≈ 250

b) POQ = 1.59 ≈ 2 months

c) Cost of EOQ = 1275 USD

   Cost of POQ = 937.5 USD

Explanation:

Again, the essential data is not provided in this question but I have found this question on internet and I will share the required data here in this solution:

a) EOQ = Economic Order Quantity:

FIrst of all, we have to calculate EOQ and for that we have following formula:

Holding Cost = 0.75

Setup Cost = 150

So, here's the required data which is missing in the question:

Month                1        2       3         4         5         6       7

Requirement   100    150    200    150     100    150    250

Now, we are good to go:

So, from the above data we will calculate the Demand:

Demand (D) = Sum of requirement / Total Time Period

D = 100 + 150 + 200 + 150 + 100 + 150 + 250/ 7

D = 157.14

Formula for EOQ:

EOQ = $\sqrt{\frac{2SD}{H} }$

S = Setup Cost = 150

D= Demand = 157.14

H = Holding Cost = 0.75

Let's plug in the values:

EOQ = $\sqrt{\frac{2*150*157.14}{0.75} }$

EOQ = 250.71

EOQ ≈ 250

So, the economic order quantity for the above given data is 250 units.

b) POQ = Periodic Order Quantity

Periodic Order Quantity = Economic Order Quantity/ Demand

POQ = 250/157.14

POQ = 1.59 ≈ 2 months

Now, as we have both POQ and EOQ at hand. Next step is to calculate the cost of each plan as mentioned in the question. For which we need MRP of each plan.

1. Cost of Economic Order Quantity:

First of all let me write down the MRP = Materials Requirement Planning Data for EOQ:

Requirement   100    150    200    150     100    150    250

Available           0      150      0        50     150     50     150

Ordered           250    0      250    250     0       250    250  

End Inventory   150    0       50     150     50       150     150    700

Now, Let's Calculate the Cost of EOQ:

Setup Cost = Number of Orders x Setup Cost Given

Setup Cost =  5 x 150

Setup Cost = 750 USD

Holding Cost = Holding Cost per item given x Number of Inventory held

Holding Cost = 0.75 x 700

Holding Cost = 525 USD

Now, Calculate the Total Cost of EOQ:

Total Cost of EOQ = Setup Cost + Holding Cost

Total Cost of EOQ = 750 + 525

Totol Cost of EOQ = 1275 USD

2. Cost of POQ:

Similarly, we have to calculate the Cost of POQ. For that, we need MRP of POQ as well:

MRP for POQ:

Requirement   100    150    200    150     100       150      250

Available           0      150      0       150      0          150       0

Ordered           250    0      350      0         250       0       250  

End Inventory   150    0       150      0          150       0         0           450

Setup Cost = Number of Orders x Setup Cost Given

Setup Cost =  4 x 150

Setup Cost = 600 USD

Holding Cost = Holding Cost per item given x Number of Inventory held

Holding Cost = 0.75 x 450

Holding Cost = 337.5 USD

Total Cost of EOQ = Setup Cost + Holding Cost

Total Cost of EOQ = 600 + 337.5

Totol Cost of EOQ = 937.5 USD