Question

Satriale uses 145,600 switches per year (or 2,800 per week) and currently orders 2,800 weekly (assume they are delivered immediately). If the carrying cost per switch is $6.20 and the fixed order cost is $1,200, is the company’s inventory policy optimal? What is the economic order quantity they should use? How much money will they save by changing their ordering behavior to that quantity compared to what they are spending now?

Answer 1

Solution :-

A = Annual Consumption = 145600 Switches

C = Carrying cost per switch = $6.20

O = Ordering Cost = $1200

EOQ = Economic Order Quantity = Sqrt (2AO/C)

= Sqrt( 2*145600*1200/$6.20 ) = Sqrt ( 56361290 ) = 7507.416 = 7508 Units

Here Currently the Company gives order OF 2800 Units

(A) So the Company's Inventory Policy is not optimal

(B) The Economic Order Quantity Company should use is of 7508 Units

(C) In Case of Order Quantity of 2800 Units

Total Orders by company = 145600/2800 = 52 Orders

Ordering Cost = 52 * 1200 = $62400

Carring Cost = (2800/2)*$6.20 = $8680

Total Carring and Ordering cost = $62400 + $8680 = $71080

In Case of Economic Order Quantity of 7508 Units

Total Orders = 145600 / 7508 = 19.39 = 20 Orders

Ordering Cost = 20 * 1200 = $24000

Carring Cost = (7508/2)*$6.20 = $23274.8

Total Carring and Ordering cost = $24000 + $23274.8 = $47274.8

Therefore Saving by company due to Change in order quantity = $71080 - $47274.8 = $23805.2