Question

JL.81 As a result of many process improvements and IT implementations (like EDI), Big Box-Mart has been able to reduce its order costs from $18.17 to $5.09 when purchasing cases of paper towels from its main paper-products supplier. Annual demand is expected to be 164,000 cases and annual holding costs are $19.56 per case.

Hint #1: This is a purchasing order quantity problem (EOQ), not a production order quantity problem. For this question we are combining a JIT concept (lower ordering costs) with what you learned from a previous chapter (inventory management). If necessary, refer back to that chapter.
Hint #2: Remember to use cell references in all your formulas rather than using a rounded input value from a previous calculation.

Based on this information, what will be the new optimal order quantity (using the reduced ordering cost)? (Display your answer to the nearest whole number.)
   

When using the reduced ordering cost, as compared to the original ordering cost, by how many cases will the average inventory go down? (Display your answer to the nearest whole number.)
   

What will be the annual total combined savings to ordering costs and holding costs when using the reduced order cost, as compared to the original ordering cost? (Display your answer to two decimal places.)
   

Answer 1

CASE 1 : WHEN ORDERING COST IS $ 18.17

Annual Demand (D) = 164,000 cases

Ordering cost per order (S) = $ 18.17

Annual Holding cost per unit (H) = $ 19.56

EOQ = 552 cases

Average Inventory = Q/2

Average Inventory = 552/2

Average Inventory = 276 cases

Annual Inventory Cost = (D/Q) × S + (Q/2) × H

Annual Inventory Cost = [(164,000/552) × 18.17] + [(552/2) × 19.56]

Annual Inventory Cost = 5398.3333 + 5398.56

Annual Inventory Cost = $ 10,796.8933

CASE 2: WHEN ORDERING COST IS $ 5.09

Annual Demand (D) = 164,000 cases

Ordering cost per order (S) = $ 5.09

Annual Holding cost per unit (H) = $ 19.56

(A)

EOQ = 292 cases

Optimal Order Quantity = 292 cases

(B)

Average Inventory = Q/2

Average Inventory = 292/2

Average Inventory = 146 cases

Reduction in average Inventory = 276 - 146

Reduction in average Inventory = 130 cases

(C)

Annual Inventory Cost = (D/Q) × S + (Q/2) × H

Annual Inventory Cost = [(164,000/292) × 5.09] + [(292/2) × 19.56]

Annual Inventory Cost = 2,858.767 + 2855.76

Annual Inventory Cost = $ 5714.527

Savings in Annual Inventory Cost = $ 10,796.8933 - $ 5714.527

Savings in Annual Inventory Cost = $ 5082.3663

Savings in Annual Inventory Cost = $ 5,082.37