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Ergonomics, Inc. sells ergonomically designed office chairs. The company provided the following information: Average Demand =...

Ergonomics, Inc. sells ergonomically designed office chairs. The company provided the following information:

Average Demand = 15 units per day

Average lead time = 20 days

Item unit cost = $60 for orders of less than 200 units

Item unit cost = $58 for orders of more 200 units or more

Ordering costs = $30

Inventory carrying costs = 25%

The business year is 250 days

Based on the above information:

  1. How many chairs should the firm order each time?
  2. What will the firm’s average inventory be under each alternative?
  3. What will be the breakdown of cost for each alternative?

Assume there is no uncertainty at all about demand or the lead time.

Please include calculations.

Solutions

Expert Solution

Solution:-

EOQ at $60 price-

Demand = 15 units per day * 250 days = 3,750 Units

EOQ =

EOQ =

EOQ = 122.47 Units or 122 units.

Average Inventory =

Average Inventory =

Average Inventory = 61 Units

Total Annual cost of ordering 122 Units-

Annual Ordering Cost =

Annual Ordering Cost =

Annual Ordering Cost = $1,229.51

Annual Carrying Cost =

Annual Carrying Cost =

Annual Carrying Cost = $915

Annual Production cost = $3,750 * $60 = $2,25,000

Total Cost = Annual Production cost + Annual Ordering cost + Annual Carrying Cost

Total Cost = $2,25,000 + $1,229.51 + $915

Total Cost = $2,27,144.51

EOQ at $58 price-

Demand = 15 units per day * 250 days = 3,750 Units

EOQ =

EOQ =

EOQ = 124.57 Units or 125 units.

Average Inventory =

Average Inventory =

Average Inventory = 62.50 Units

Total Annual cost of ordering 125 Units-

Annual Ordering Cost =

Annual Ordering Cost =

Annual Ordering Cost = $1,200

Annual Carrying Cost =

Annual Carrying Cost =

Annual Carrying Cost = $906.25

Annual Production cost = $3,750 * $58 = $2,17,500

Total Cost = Annual Production cost + Annual Ordering cost + Annual Carrying Cost

Total Cost = $2,17,500 + $1,200 + $906.25

Total Cost = $2,19,606.25

The Firm should order 200 chairs each time as this will save ($2,27,144.51 - $2,19,606.25) = $7,538.26 each year.

If you have any query related to question then feel free to ask me in a comment.Thanks.

jeff jeffy answered 1 year ago
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