Question

Southeastern Bell stocks a certain switch connector at its central warehouse for supplying field service offices. The yearly demand for these connectors is 15,600

units. Southeastern estimates its annual holding cost for this item to be ?$26 per unit. The cost to place and process an order from the supplier is ?$74.

The company operates 300 days per? year, and the lead time to receive an order from the supplier is 2 working days.

a. what is the economic order quantity? (round to the nearest whole number)

b. what are the annual holding costs? (round to the nearest whole number)

c. what are the annual ordering costs? (round to the nearest whole number)

d. what is the reorder point? (round to the nearest whole number)

Answer 1

Given values:

Annual demand, D = 15,600

Annual Holding cost, H = $26 per unit

Ordering cost, Co = $74

Number of working days = 300

Lead time = 2 days

Solution:

(a) Economic order quantity (EOQ) is calculated as;

EOQ = SQRT [(2 x D x Co) / H]

where,

D = Annual demand

Co = Ordering cost

H = Holding cost

Putting the given values in the above formula, we get;

EOQ = SQRT [(2 x 15600 x 74) / 26]

EOQ = 297.99 or 298

EOQ = 298 units

(b) Annual holding cost is calculated as;

Annual holding cost = EOQ/2 x H

Annual holding cost = 298/2 x $26

Annual holding cost = $3,874

(c) Annual ordering costs is calculated as;

Annual ordering costs = D/EOQ x Co

Annual ordering costs = 15600/298 x $74

Annual ordering costs = $3,873.83 or $3,874

Annual ordering costs = $3,874

(d) Reorder point (ROP) is calculated as;

ROP = Daily demand x lead time

ROP = (Annual demand / Number of working days) x lead time

ROP = (15600 / 300) x 2

ROP = 104 units