Question

In: Statistics and Probability

Lakeland Company

EOQ for manufacturer. Lakeland Company, which produces lawn mowers, purchases 18,000 units of a rotor blade part each year at a cost of $60 per unit Lakeland requires a 15% annual rate of return on investment In addition, the relevant carrying cost (for insurance, materials handling, breakage, and so on) is $6 per unit per year The relevant ordering cost per purchase order is $150.

1. Calculate Lakeland’s EOQ for the rotor blade part.

2. Calculate Lakeland’s annual relevant ordering costs for the EOQ calculated in requirement 1.

3. Calculate Lakeland’s annual relevant carrying costs for the EOQ calculated in requirement 1.

4. Assume that demand is uniform throughout the year and known with certainty so that there is no need for safety stocks. The purchase-order lead time is half a month. Calculate Lakeland’s reorder point for the rotor blade part.

Solutions

Expert Solution

EOQ for manufacturer.

 

1.         

Relevant carrying costs per part per year:

Required annual return on investment 15% × $60 =                    $ 9

Relevant insurance, materials handling, breakage, etc.

 costs per year                                                                                       6

Relevant carrying costs per part per year                                      $15

With D = 18,000; P = $150; C = $15, EOQ for manufacturer is:

 

2.

 

3.

At the EOQ, total relevant ordering costs and total relevant carrying costs will be exactly equal. Therefore, total relevant carrying costs at the EOQ = $4,500 (from requirement 2). We can also confirm this with direct calculation:

 

4.         

Purchase order lead time is half a month.

Monthly demand is 18,000 units ÷ 12 months = 1,500 units per month.

Demand in half a month is 1/2 × 1,500 units or 750 units.

Lakeland should reorder when the inventory of rotor blades falls to 750 units.

Purchase order lead time is half a month.

Monthly demand is 18,000 units ÷ 12 months = 1,500 units per month.

Demand in half a month is 1/2 × 1,500 units or 750 units.

Lakeland should reorder when the inventory of rotor blades falls to 750 units.

Raffay answered 2 years ago
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