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


Related Solutions

In inventory management, economic order quantity (EOQ) is the order quantity that minimizes the total holding...
In inventory management, economic order quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering costs. It is one of the oldest classical production scheduling models. Requirements: Discuss the EOQ Model using an quantitative example computation with interpretation of the solution. 2. The B. N. Thayer and D. N. Thaht Computer Company sells a desktop computer that is popular among gaming enthusiasts. In the past few months, demand has been relatively consistent, although it does fluctuate...
q1 The continuous review economic order quantity (EOQ) inventory model operates using two model parameters. These...
q1 The continuous review economic order quantity (EOQ) inventory model operates using two model parameters. These two parameters are: Select one: a. Q, which represents a fixed order quantity and R, which represents a variable reorder point quantity of inventory. b. Q, which represents a variable order quantity and R, which represents a fixed reorder point quantity of inventory. c. Q, which serves as the amount of inventory that triggers the release of an order and R, which is the...
The Economic Order Quantity (EOQ) model is a classical model used for controlling inventory and satisfying...
The Economic Order Quantity (EOQ) model is a classical model used for controlling inventory and satisfying demand. Costs included in the model are holding cost per unit, ordering cost and the cost of goods ordered. The assumptions for that model are that only a single item is considered, that the entire quantity ordered arrives at one time, that the demand for the item is constant over time, and that no shortages are allowed. Suppose we relax the first assumption and...
Economic Order Quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering...
Economic Order Quantity (EOQ) is the order quantity that minimizes the total holding costs and ordering costs. 1) What's the impact of a positive lead time on EOQ? 2) Can supply chain managers in fast-fashion industries apply the EOQ model to manage their inventories? If yes, how? If no, why?
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small cost, especially...
COST ACCOUNTING Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory...
COST ACCOUNTING Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small cost, especially...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within...
Companies can use the Economic Order Quantity (EOQ) method to maintain the existing inventory conditions within the company, especially to reduce the existing fixed costs that can arise from the purchase of goods using expedition services. For example, buying goods with Full Container Load (FCL) and Less Container Load (LCL), the LCL fixed cost will be greater because the goods purchased are small but the tariff for sending goods from the supplier to the factory requires no small cost, especially...
Using the EOQ​ model, if a​ firm's order quantity is 500 units and its annual holding...
Using the EOQ​ model, if a​ firm's order quantity is 500 units and its annual holding cost is greater than its annual setup​ cost, then what can we say about the optimal order​ quantity? A. Optimal order quantity​ = 500 units B. Optimal order quantity​ < 500 units C. Optimal order quantity​ > 500 units D. Not enough information is given to answer the question
Which of the following is NOT an assumption of the traditional economic order quantity (EOQ) model?...
Which of the following is NOT an assumption of the traditional economic order quantity (EOQ) model? a. Holding and ordering costs are stable and known. b. Demand is constant and known. c. Supply lead time is constant and known. d. Quantity discounts are possible. Kim’s Nail Salon uses a weighted moving average method to forecast demand. She assigns a weight of 5 to the previous month’s demand, 3 to demand two months ago, and 2 to demand three months ago....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT