Question

You manage the shipping of item #A452 from your supplier. The shipments for this item are delivered to the nearest port, and you have to transport them to the distribution center. You have two options, truck load (TL) and less than truck load (LTL).

Your company needs 5000 units of #A452 per year and it is purchased at a price of $36 per unit. Each order costs $90. Your company uses a holding charge of 0.1, a cycle service level of 90% and 365 days per year for planning purposes.

The truck load (TL) option costs $1200 per load. It takes 4 days to deliver and each truck can carry up to 1300 items.

The less than truck (LTL) load option costs $2.0 per item. It takes 6 days to deliver.

You have three options,

OPTION A: to use the TL option and delivery full truck loads,

OPTION B: to use the TL option and delivery the economic order quantity

OPTION C: to use LTL option and deliver the economic order quantity.

For all following parts, consider transportation costs as an item cost unless otherwise specified. i.e., the total variable cost of #A452 in the Full truckload is $1200/1300items + $36/item = $36.9230769231/item.

What is the sum of average pipeline and cycle inventory, ordering, and purchase costs for option A? Please provide your answers rounded to the closest dollar. (Please note that the answer is 184828, or near, is just i do not know how to compute it. Please kindly show your working here.)

Answer 1

Only the option A is calculated as asked in the question

Innventory holding charge of 0.1 given which is 10% of value of the product (36 $).

Inventory cost per unit per year = 10% * 36 =3 .6 $

EOQ = sqrt (2 * D * K / h) where

D = Annual Demand

K = Fixed cost per order (ordering cost)

h = annual holding cost per unit

EOQ = sqrt (2 * 5000 * 90 / 3.6)

500

1 A) Option A = Full Truck load Delivery

Annual Demand = 5000

Daily demand = 5000/365 = ~ 14

Purchase cost per item = Item cost = $1200/1300items + $36/item = $36.9230769231/item.

Cycle Inventory = FTL = 1200 units

Average Pipeline = Cycle inventory/2 = 1200/2 = 600

No of orders required annually = roof value (5000 / 1200) = 4.17

Annual Ordering cost = 4.17 * 90 = 375.3 $

Therefore the full average pipeline and cycle inventory cost of ordering and purchase cost

Total Purchase cost

5000*36.9230769231

$184,615

Ordering Cost

$375.30

Total Cost                                                                                                                                                              $184990.3