Question

Assume: Demand = 3000 units/year Inventory value = $60/unit Order placement cost = $400/order Annual carrying costs = $0.30 per dollar held/yr or “30%” If you supplier calls with a special 1X discount of 10%, what would the savings be?

Answer 1

DEMAND = 3000
ORDERING COST = 400
HOLDING COST = 18
COST PER UNIT = 60

EOQ = SQRT(2 * D * S / H), WHERE D = DEMAND, S = ORDERING COST AND H = HOLDING COST = SQRT(2 * 3000 * 400 / 18) = 365

ANNUAL HOLDING COST = AVERAGE INVENTORY * PER UNIT HOLDING COST = (365 / 2) * 18 = 3285

ANNUAL ORDERING COST = NUMBER OF ORDERS * ORDERING COST = (3000 / 365) * 400 = 3287.67

COST OF MANAGING = ANNUAL HOLDING COST + ANNUAL ORDERING COST = 3285 + 3287.67 = 6572.67

AFTER THE DISCOUNT

DEMAND = 3000
ORDERING COST = 400
HOLDING COST = 16.2
COST PER UNIT = 54

EOQ = SQRT(2 * D * S / H), WHERE D = DEMAND, S = ORDERING COST AND H = HOLDING COST = SQRT(2 * 3000 * 400 / 16.2) = 385

ANNUAL HOLDING COST = AVERAGE INVENTORY * PER UNIT HOLDING COST = (385 / 2) * 16.2 = 3118.5

ANNUAL ORDERING COST = NUMBER OF ORDERS * ORDERING COST = (3000 / 385) * 400 = 3116.88

COST OF MANAGING = ANNUAL HOLDING COST + ANNUAL ORDERING COST = 3118.5 + 3116.88 = 6235.38

SAVINGS

6235.38 - 6572.67 = 337.29

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