Question

Southeastern Bell stocks a certain switch connector at its central warehouse for supplying field service offices. The yearly demand for these connectors is 15,000 units. Southeastern estimates its annual holding cost for this item to be $25 per unit. The cost to place and process an order from the supplier is $75. The company operates 300 days per year, and the lead time to receive an order from the supplier is 2 working days.

a) Find the economic order quantity.
b) Find the annual holding costs.
c) Find the annual ordering costs.
d) What is the reorder point?

Answer 1

a) Economic order quantity \(=\) square root \(\left(2^{*}\right.\) demand \(*\) fixed cost/ holding cost) \(=\) square root \(\left\lfloor 2^{*} 15000 * 75 / 25\right)=300\)

b) Annual holding cost \(=25^{*} 300 / 2=\$ 3750\)

c) Annual ordering cost \(=15000^{*} 75 / 300=\$ 3750\)

d) Demand per day \(=15000 / 300=50\) units

Reorder point considering no safety stock \(=50^{*}\) lead time \(=50^{*} 2=100\) units