Economic ordering quantity, reorder point, and safety stock Roaldi Products buys

Question

Economic ordering quantity, reorder point, and safety stock

Roaldi Products buys 200,000 motors per year from a supplier that can fulfill orders within two days of receiving them. Roaldi transmits its orders to this supplier electronically, so the lead time to receive orders is two days. Roaldi’s order cost is about $295 per order and its carrying cost is about $37 per motor per year. The firm maintains a safety stock of motors equal to six days of usage. Assume a 365-day year.

(a)What is Roaldi’s economic order quantity for the motors?

(b)What is its total cost at the EOQ?

(c)How large a safety stock (in units) of motors should Roaldi maintain?

(d)What is Roaldi’s reorder point for motors? (Hint: Be sure to include the safety stock.)

(e)If Roaldi has an opportunity to reduce either its order cost or its carrying cost by 10%, which would result in the lowest total cost at the associated new EOQ?

(f)How much total cost savings will result from the lowest-cost strategy found in part (e) relative to the total cost found in part (b)?

Explanation / Answer

EOQ= (2*Ordering cost/order*Annual usage)/Carrying cost of one unit for one year

Given ; Ordering cost =$295 per order

Carrying cost = $37 per item per year

Annual usage =200,000 per year               

EOQ= (2*295*200,000)/37=3,189,189.18=1785.83=1786 approx

So EOQ is 1786 units

Total cost at the EOQ;

Total orders= 200,000/1786=112

Ordering cost =112*295=$33,040

Inventory carrying cost for average stock =1786/2*37=$33,041

So total cost at EOQ = $33,040+$33,041=$66,081

Average daily use of motor= 200,000/365= 548 units per day,

Safety stock = 6 days of usage = 548*6 = 3288 nos

So safety stock is 3,288 units.

Reorder point = safety stock + lead time*average daily consumption

= 3,288 + 4*548=3,288+2,192=5,480 unitss

So reorder point is 5,480 nos.

Total cost at the EOQ;

Ordeing cost reduced by 10% , so revised ordering cost /order is 265.50

Revised EOQ= 2*265.5*200000/37=1694

Total orders= 200,000/1694=118

Ordering cost =118*265.50=$31,329

Inventory carrying cost for average stock =1694/2*37=$31,339

So total cost at EOQ = $31,329+$31,339=$62,668

Inventory carrying cost reduced by 10%

Revised inventory carrying cost = 33.30 per item per year.

Revised EOQ = 2*295*200000/33.3=1882

Total orders= 200,000/1882=106

Ordering cost =106*295=$31,270

Inventory carrying cost for average stock =1882/2*33.30=$31,335.30

So total cost at EOQ = $31,270+$31,335.30=$62,605.30

So reduction is carrying cost per unit per year would result in a lower cost .

Total cost saving would be =$66,081 -$62,605.30= $3,475.70

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