Problem 2 - For supply item ABC, Andrews Company has been ordering 125 units bas
ID: 2700197 • Letter: P
Question
Problem 2 - For supply item ABC, Andrews Company has been ordering 125 units based on the recommendation of the salesperson who calls on the company monthly. A new purchasing agent has been hired by the company who wants to start using the economic-order-quantity method and its supporting decision elements. She has gathered the following information:
Annual demand in units
250
Days used per year
250
Lead time, in days
10
Ordering costs
$100
Annual unit carrying costs
$20
Determine the EOQ, average inventory, orders per year, average daily demand, reorder point, annual ordering costs, and annual carrying costs. (17 points)
Annual demand in units
250
Days used per year
250
Lead time, in days
10
Ordering costs
$100
Annual unit carrying costs
$20
Explanation / Answer
D = Annual demand (units)=250
S = Cost per order ($) =$100
H = Holding cost ($) = $20
Lead Time LT = 10 days
So EOQ = Sqrt(2*D*S/H)
EOQ = sqrt(2*250*100/20) = 50 units
Average Inventory = EOQ/2 = 50/2 = 25 units
Orders Per Year = Annual Demand/EOQ = 250/50 = 5 order
Average Daily Demand = Annual Demand/No of days = 250/250 = 1 unit per day
Reorder Point = Lead Time* Daily demand = 10*1 = 10 units
Annual Ordering Costs = No of Orders*Cost per order = 5*$100 = $500
Annual Carrying Costs = Avge Inventory*Holding cost = 25*$20 = $500
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