Question

Fisher is an electronic supplier has annual demand 9000 units. The supplier pays $2000 for each unit and estimate that the annual holding cost 1% of the price. It costs approximately $200 to place an order (managerial and clerical cost). Assume the operates on a 300 day working year.

1. Apply the economic order quantity model to determine Q*
2. How many expected orders be placed per year using the calculated EOQ?
3. Determine the annual ordering, holding and total inventory costs for the EOQ.
4. Guide the management by calculating the expected time between orders
5. If the company used to order 900 units in each order, should the firm stick with the old supplier or take advantage of the new order quantity?

Answer 1

Given Data: Annual Demand, D = 9000 Units

Order cost = $200/ Order

Holding cost = 1% of $2000 = $20/unit

A) Economic Order Quantity, Q = (2DS / H)^1/2

= (2*9000*200 / 20)^1/2

= 424.26

~ 425 Units

B) Expected number of orders = Annual Demand / EOQ

= 9000 / 425

= 21.17 Orders

C) Annual Ordering Cost = S * D/Q

= 200 * (9000/425)

= $ 4,235.29

Annual Holding Cost = H * Q/2 = 20 * 425/2

= $4250

Annual Total Inventory Cost = Annual Holding cost + Annual Order cost

= $4250 + $4235.29

= $8485.29

D) Expected time between orders = No. of days in a year / No. of Orders

= 300 / (9000/425) = 14.17 Days

E) Earlier if Order Quantity, Q = 900 Units

We'll compute the total inventory costs:

Annual Order costs = (D/Q) * S = (9000/900) * 200

= $2,000

Annual Holding Cost = Q/2 * H = 900/2 * 20

= $ 9000

Annual Inventory cost = $2000 + $9000 = $11,000

Since the annual inventory costs of the new supplier whose order size is 425 units is lesser than the old supplier whose order size is 900 units, the firm can take advantage of the new order quantity.