Question

1. Ross White’s machine shop uses 2,500 brackets during the course of a year, and this usage is relatively constant throughout the year. These brackets are purchased from a supplier 100 miles away for $15 each, and the lead time is 2 days. The holding cost per bracket per year is $1.50 (or 10% of the unit cost), and the ordering cost per order is $18.75. There are 250 working days per year.

   1. What is the EOQ?

   2. Given the EOQ, what is the average inventory? What is the annual inventory holding cost?

   3. In minimizing cost, how many orders would be placed each year? What would be the annual ordering cost?

   4. Given the EOQ, what is the total annual inventory cost (including purchase cost)?

   5. What is the time between orders?

   6. What is the ROP?

Answer 1

Solution:

Given that Demand, = 2500, Ordering cost, = 18.75 and Holding cost, = 1.5

a. The Economic Order Quantity, is calculated using the formula:-

= 250

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b. The average inventory is calculated as follows:-

Average inventory =

Average inventory = 250/2

Average inventory = 125

And the annual inventory holding cost

Annual inventory holding cost =

Annual inventory holding cost = 125*1.5

Annual inventory holding cost = $187.5

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c. Number of orders =

Number of orders = 2500/250

Number of orders = 10

Therefore, 10 orders should be made each year.

Annual ordering cost =

Annual ordering cost = 18.75*10

Annual ordering cost = $187.5

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d. The total annual inventory cost is the sum of annual inventory holding cost, annual ordering cost and purchase cost.

Total annual inventory cost =  Annual inventory holding cost+ annual ordering cost + purchase cost

Total annual inventory cost =187.5+187.5+2500*15

Total annual inventory cost =$37875

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e. Since we need to order 10 times in a year and lead time is 2 days, the time between the orders is

365/10 - 2 = 34.5 days

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f. The Reorder Point, is calculated as follows

= (2/365)*2500

= 13.6986 ~ 14