Question

Generators R Us (GRU) is a leading manufacturer of partible electric generators used for emergency power supply in both civil and private disaster situations. Each year it produces 16,000 of its model HI-360 units. This model used two bearings, which the company purchases from an outside vendor. A review of accounting and usage records reveals the following information:

labour for installing the bearings = $8 per generator;

• per-unit cost of bearings = $25;

• delivery charges per order = $5;

• processing costs per order = $6;

• mailing expenses per order = $2; and

• the estimated cost of carrying one bearing in inventory for the ear = $0.35.

GRU also found that on average four days elapse between the time an order is placed and the time items are received. Required: a) Compute the economic order quantity. b) Compute the reorder point. Assume that the HI-360 model is manufactured for 350 days each year

Answer 1

Ans a.
EOQ
Details
Annual usgae =16000 units*2 bearings=	32,000
Ordering cost per order
Processing cost/order =$6
Delivery charge per order =$5
Mailing expense per order =$2
Total ordering cost/order =$13
Carrying cost per unit per year	$                                      0.35

EOQ = Sq Root of [(2*Ordering cost*Annual usage)/Carrying cost per unit]
EOQ=Sq Rt [(2*32000*13/0.35)]
EOQ =1541.8
So Economic Order Qty =1541.8

Ans b
Annual Consumption of the bearing	32,000
Annual production days =	350
Per day consumtion of bearing =32000/350=	91.43
Lead Time for supply of bearing in days	4
Consumption during lead time =4*91.43=	366
So Re-order point is 366 nos of bearings.