Question

Joe​ Henry's machine shop uses 2450 brackets during the course of a year. These brackets are purchased from a supplier 90 miles away. The following information is known about the​ brackets:

Annual demand 2,450

Holding cost per bracket per year $ 1.25

Order cost per order $ 18.25

Lead time 2 days

Working days per year 250

a.) Given the above information, what would be the economic order quantity (EOQ)?

b.) Given the EOQ, what would be the average inventory? What would be the annual inventory holding cost?

c.) Given the EOQ, how many orders would be made each year? What would be the annual order cost?

d.) Given the EOQ, what is the total annual cost of managing the inventory?

e.) What is the time between orders?

f.) What is the reorder point (ROP)

Answer 1

Joe​ Henry's machine shop uses 2450 brackets during the course of a year. These brackets are purchased from a supplier 90 miles away. The following information is known about the​ brackets:

Annual demand 2,450

Holding cost per bracket per year $ 1.25

Order cost per order $ 18.25

Lead time 2 days

Working days per year 250

Question A: Given the above information, what would be the economic order quantity (EOQ)?

Answer:

Economic Order Quantity (EOQ), is given by: ( 2 × D × S / H ) ½

Here

D = 2450, S = $18.25, H = $1.25

Hence

= ( 2 × 2,450.00 × 18.25 / 1.25 ) 1/2

= ( 71,540.00 ) 1/2

= 267.47

=> EOQ = 267.47

Question B: Given the EOQ, what would be the average inventory? What would be the annual inventory holding cost?

Answer:

1. Average Inventory is given by: EOQ / 2

Here:

EOQ = 267.47

Hence:

Average Inventory = 267.47 / 2

=> Average Inventory = 133.73

2. Annual inventory holding cost is given by: (EOQ x H) / 2

Here:

EOQ = 267.47, H = $1.25

Hence:

Annual inventory holding cost = (267.47 x 1.25) / 2

=> Annual inventory holding cost = 167.17

Question C: Given the EOQ, how many orders would be made each year? What would be the annual order cost?

Answer:

1. Number of orders placed per year, is given by: D / EOQ

Here:

D = 2450, EOQ = 267.47

Hence:

Number of orders placed per year = 2450 / 267.47

=> Number of orders placed per year = 9.16

2. Annual Order Cost is given by: (D x S) / EOQ

Here:

D = 2450, S = 18.25, EOQ = 267.47

Hence:

Annual Order Cost = (2450 x 18.25) / 267.47

=> Annual Order Cost = 167.17

Question D:  Given the EOQ, what is the total annual cost of managing the inventory?

Answer:

Annual Total Cost, is given by: (D x S) / EOQ + (EOQ x H) / 2

Here:

D = 2450, S = 18.25, EOQ = 267.47, H = 1.25

Hence:

Annual Total Cost = (2450 x 18.25) / 267.47 + (267.47 x 1.25) / 2

=> Annual Total Cost = 334.34

Question E: What is the time between orders?

Answer:

Time between orders, is given by: No of working Days / Number of orders placed per year

Here:

No. of working days = 250, Number of orders placed per year = 9.16

Hence:

Time between orders = 250 / 9.16

=> Time between orders = 27.30

Question F: What is the reorder point (ROP)

Answer:

Reorder Point, is given by: (Demand per day) x (Lead time for a new order in days)

Here:

Demand per day = D / No. of working days = 2450 / 250 = 9.8, Lt (Lead Time) = 2 days

Hence:

Reorder Point = 9.8 x 2

=> Reorder Point = 19.6