Question

The Talbot Company uses electrical assemblies to produce an array of small appliances. One of its high cost / high volume assemblies, the XO-01, has an estimated annual demand of 8,000 units. Talbot estimates the cost to place an order is $50, and the holding cost for each assembly is $20 per year. The company operates 250 days per year.

Use the information,

1. What is the economic order quantity for the XO-01?

2. What is the annual inventory holding cost if Talbot orders using the EOQ quantity?

3. What is the total annual holding and ordering costs if Talbot orders using the EOQ quantity?

4. What is the cycle length (time between orders) when orders are placed using the EOQ quantity?

5. How many times per year must Talbot order the XO-01 when orders are placed using the EOQ quantity?

Answer 1

DEMAND = 8000

ORDERING COST = 50

HOLDING COST = 20

WORKING = 250

1. EOQ = SQRT(2 * D * S / H), WHERE D = DEMAND, S = ORDERING COST AND H = HOLDING COST = SQRT(2 * 8000 * 50 / 20) = 200

2. ANNUAL HOLDING COST = AVERAGE INVENTORY * PER UNIT HOLDING COST = (200 / 2) * 20 = 2000

3. ANNUAL ORDERING COST = NUMBER OF ORDERS * ORDERING COST = (8000 / 200) * 50 = 2000

COST OF MANAGING = ANNUAL HOLDING COST + ANNUAL ORDERING COST = 2000 + 2000 = 4000

4. TIME BETWEEN ORDERS = EOQ / DAILY DEMAND = 200 / (8000 / 250) = 6.25

5. NUMBER OF ORDERS = DEMAND / EOQ = 8000 / 200 = 40