Question

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

Average demand = 30 units per day

Average lead time = 44 days

Item unit cost = $64 for orders of less than 340 units

Item unit cost = $62 for orders of 340 units or more

Ordering cost = $39

Inventory carrying cost = 25%

The business year is 250 days

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

a. Calculate EOQ if unit cost is $64 and $62. (Note: These EOQs do not need to be feasible in their price range.) (Round up your answers to the next whole number.)

b. Calculate annual ordering costs for each alternative? (Round your answers to 2 decimal places.)

c. Calculate annual inventory carrying costs for each alternative? (Round your answers to 2 decimal places.)

d. Calculate annual product costs for each alternative?

e. What will be the total costs for each alternative? (Round your answers to 2 decimal places.)

f. Based on your analysis, how many chairs should they order at a time? (Round your answers to 2 decimal places.)

g. How much the firm can save annually by using the order quantity in Part f. instead of the first EOQ shown in Part a? (Round your answer to 2 decimal places.)

Answer 1

D = annual demand, U = unit cost, Co = Order cost, Ci = inventory carrying cost

D= 30 x 250 = 7500 units

U = $64 (if order < 340); $62 (if order > = 340)

Co = $39

Ci = 25%

a. EOQ

EOQ at $64 = (2 x 7500 x $39) / ($64 x 0.25) => 36562.5 => by taking square root 191.21 or 191 units

EOQ at $62 = (2 x 7500 x $39) / ($62 x 0.25) => 37,741.94 => by taking square root 194.27 or 194 units

b. Annual Ordering Costs

at 191 units = $39 x (7500 / 191) = $1,531.53

at 194 units = $39 x (7500 / 194) = $1,507.74

c. Annual Inventory Carrying Costs

at 191 units = $64 x 0.25 (191/2) = $1,528

at 194 units = $62 x 0.25 (194/2) = $1,503.5

d. Annual Product Costs

at 191 units = $64 x 7500 = $480,000

at 194 units = $62 x 7500 = $465,000

e. Total Costs

at 191 units = $480,000 + $1,531.53 + $1,528 = $483,059.53

at 194 units = $465,000 + $1,507.74 + $1,503.5 = $468,011.24

f. On the basis of above analysis Ergonomics should order 194 units at a time as it is cheaper than other option.

g. Annual Savings = $483,059.53 - $468,011.24 = $15,048.29

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