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In: Operations Management

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

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

Average demand = 35 units per day

Average lead time = 49 days

Item unit cost = $69 for orders of less than 390 units

Item unit cost = $65 for orders of 390 units or more

Ordering cost = $44

Inventory carrying cost = 20%

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 $69 and $65. (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.)

Solutions

Expert Solution

Average demand d = 35 units per day

Annual demand D = 35*250 days = 8750

Average lead time L = 49 days

Item unit cost C = $69 for orders of less than 390 units

= $65 for orders of 390 units or more

Ordering cost S = $44

Inventory carrying cost = 20%

H = 0.2*69 = 13.8 for orders of less than 390 units

H = 0.2*65 = 13 for orders of 390 units or more

The business year is 250 days

Unit cost is $69

EOQ = 236 units (Feasible)

Unit cost is $65

EOQ = 243 units (Not Feasible)

We calculate the costs at Q = 236 and 390

Q = 236

Annual ordering costs = (D/Q)S = (8750/236)*44 = 1631.36

Q = 390

Annual ordering costs = (D/Q)S = (8750/390)*44 = 987.18

Q = 236

Annual inventory carrying costs = (Q/2)H = (236/2)*13.8 = 1628.4

Q = 390

Annual inventory carrying costs = (Q/2)H = (390/2)*13 = 2535

Q = 236

Annual production costs = DC = 8750*69 = 603750

Q = 390

Annual production costs = DC = 8750*65 = 568750

Total cost = Annual production costs + Annual ordering costs + Annual inventory carrying costs

Q = 236

Total cost = 603750 + 1628.4 + 1631.36 = 607009.76

Q = 390

Total cost = 568750 + 2535+987.18 = 572272.18

They should order 390 chairs as the total cost is less when compare with EOQ = 236

g) Savings= 607009.76 - 572272.18 = 34738.58

keosha answered 8 months ago

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