In: Operations Management
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?
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