Question

In: Operations Management

A company examines its inventory policy and considers using an economic order quantity (EOQ) approach. They...

A company examines its inventory policy and considers using an economic order quantity (EOQ) approach. They have the following information about their bestselling model of televisions:

Annual demand - 4000 sets

Current order quantity - 80 sets

Carrying cost - $80.00/set/year

Order cost - $200

Lead time - 6 days

Operating days per year - 300 days

a. What is the current total annual cost (TC) at the current order quantity?

b. What is the economic order quantity (EOQ)?

c. What is the total annual cost at the economic order quantity (EOQ)?

d. What is the reorder point at the economic order quantity (EOQ)?

e. How much money will be saved by ordering the EOQ?

Solutions

Expert Solution

Annual demand (D) = 4000 sets

Ordering cost (S) = $200

Carrying cost (H) = $80

Lead time (L) = 6 days

Current order quantity (Q) = 80 sets

a) With the current order quantity,

Annual ordering cost = (D/Q)S = (4000/80)200 = 50 × 200 = $10000

Annual carrying cost = (Q/2)H = (80/2)80 = 40 × 80 = $3200

Total Annual cost with the current policy = Annual ordering cost + Annual carrying cost = $10000+$3200 = $13200

b) Economic order quantity (EOQ) = √(2DS/H)

= √[(2 × 4000 × 200)/80]

= √(1600000/80)

= √20000

= 141 sets

C) With the economic order quantity,

Annual ordering cost = (D/EOQ)S = (4000/141)200 = $5673.76

Annual carrying cost = (EOQ/2)H = (141/2)80 = $5640

Total Annual cost with the economic order quantity= Annual ordering cost + Annual carrying cost = $5673.76+$5640 = $11313.76

d) Reorder point = (Annual demand/number of days per year)L

= (4000/300)6

= 80 units

E) Total savings = Total annual cost with current policy - Total annual cost with EOQ

= $13200 - $11313.76

= $1886.24

keosha answered 3 months ago
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