The following production information for the Murray Manufacturing Company has be
ID: 2437570 • Letter: T
Question
The following production information for the Murray Manufacturing Company has been gathered for part number AB7 (which is used in the manufacture of one of its products):
• Murray Manufacturing buys part AB7 from a supplier.
• Murray estimates that it will need 5,400 parts this month (which has 30 days).
• Each part costs $6.89, and it costs Murray $750 to place an order for part AB7.
• It takes 8 days to receive an order of part AB7 from Murray's supplier.
• All parts orders are received, inspected, and checked into inventory the same day shipment is received.
• Inventory carrying costs are 20% of the inventory value for the month.
Required:
A. Compute the economic order quantity in units (rounded to the nearest unit) for part AB7.
B. Compute the reorder point (rounded to the nearest unit) for part number AB7
Explanation / Answer
A) Economic Order Quantity= Square root of {(2*Annual Demand*Order Cost/order)/Carrying Cost per unit}
A=Annual Demand=5400/month* 12 months=64800 units
B= Ordering Cost/order= $ 750/order
C= 20%(Cost of part)=0.2($ 6.89)= $1.378/unit
EOQ=Square root of{(2*64800*750)/1.378}=8399 units
B) Reorder Point: Since the usage is entirely constant and lead time is known with certainty the order point=Daily usage* Lead time
Reorder Point=180 units/day*8 days=1440 units
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