Knutson Products Inc. is involved in the production of airplane parts and has th
ID: 2621678 • Letter: K
Question
Knutson Products Inc. is involved in the production of airplane parts and has the following inventory, carrying, and storage costs: 1. Orders must be placed in round lots of 100 units. 2. Annual unit usage is 250,000 (Assume a 50-week year in your calculations.) 3. The carrying cost is 10% of the purchase price. 4. The purchase price is $10 per unit. 5. The ordering cost is $100 per order. 6. The desired safety stock is 5,000 units (This does not include delivery-time stock.) 7. The delivery time is 1 week. Given the forgoing information: a. Determine the optimal EOQ level. b. How many orders will be placed annually? c. What is the inventory order point? (That is, at what level of inventory should a new order be placed?) d. What is the average inventory level? e. What would happen to the EOQ if annual unit sales doubled (all other unit costs and safety stocks remaining constant)? What is the elasticity of EOQ with respect to sales? (That is, what is the percentage change in EOQ divided by the percentage change in sales?) f. If carrying costs double, what will happen to the level of EOQ? (Again assume original levels of sales and carrying costs.) What is the elasticity of EOQ with respect to ordering costs? g. If the selling price doubles, what will happen to EOQ? What is the elasticity of EOQ with respect to selling price?
Explanation / Answer
a.) EOQ=Sqrt(2DK/h) where D= Annual Demand
K= Ordering COst
h=Holding Cost=Product Price*Carrying Cost %=10*10%=1
EOQ=sqtr(2*250,000*100/1)=7071.068
Since EOQ has to be in multiples of 100, it has to be either 7000 or 7100,
For Q=7000, Total Cost=Ordering Cost+Annual Holding Cost=DK/Q+hQ/2=250,000/7000*100+10*10%*7000/2 = $7071.43
For Q=7100, Total Cost=Ordering Cost+Annual Holding Cost=DK/Q+hQ/2=250,000/7100*100+10*10%*7100/2 = 7071.13
Since cost is less for Q=7100, EOQ=7100
b)Number of Orders = Annual Demand/Q=250,000/7,100=35.21
c) Inventory Order point should be able to cover regular demand as well as demand variability over the delivery time
Inventory Order Point = Demand over Delivery Time + Safety Stock=250,000/50+5000=10,000
d) Average Inventory Level = EOQ/2+Safety Stock=7100/2+Safety Stock=3550+5000=8550 units
e) Annual Sales = 500,000
EOQ=sqrt(2*500,000*100/1)=10,000 which is in multiples of 100
So, EOQ=10,000
If sales increases by k times, EoQ will increase by sqrt(k) times
f) Caarying Cost=20%
EOQ=sqrt(2*250,000*100/2)=5000 which is in multiples of 100
So, EOQ=5,000
If Carrying Cost increases by k times, EoQ will decrease by sqrt(k) times
g) Since Selling price doesn't impact the holding cost, there will be no impact on EOQ.
Assumption in last part is that selling price is different from purchase price
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.