Question

John's Shop demand for Clippers in San Deigo averages to 500 units per month (Note: there are 12 months in a year). John's Shop ordering costs is $2,000 per order. Ordering costs include order placement, transportation and receiving. The wholesale price John's Shop pays to its vendor is $250 per snow blower and John's Shop incurs a holding cost of 20 percent. Solve the problem in Excel and show formulas.

a) What is the optimal lot size John’s Shop procurement manager should order from its vendor?

b) What is the Total Annual Cost for John’s Shop optimal replenishment policy?

c) What are two (there are more, but only prodive two) assumptions of the model you used to solve this problem?

d) Do you believe the model you used to solve (a) and (b) is a good model given these assumptions? Please justify your answer.

Answer 1

1.       Economic order quantity(optimum lot size)=

Square root of (2*Annual demand*ordering cost per order)/carrying cost per unit)

                  = square root (2*6000*2000)/20% of $250)           

                = square root (480000)

                =693 units

2.       Ordering cost= total annual demand/Economic order quantity*ordering cost per order

Carrying cost = Economic order quantity/2* carrying cost per unit

Total annual costs= ordering cost+ carrying cost

                                                     = 6000/693*2000+ 693/2*50

                                                     = 17325+17325

                                                     =$34650

3.       Economic order quantity model assumptions:

1.       Cost of ordering remain constant throughout the year

2.       The lead time is not fluctuating.

4 Economic order quantity model   helps in minimizing inventory carrying costs. Economic order quantity is the lowest amount of inventory you must order to meet peak customer demand without going out of stock and without producing obsolete inventory