Monica Bright is the purchasing agent for DM Valve Distribution Company. One of
ID: 2718480 • Letter: M
Question
Monica Bright is the purchasing agent for DM Valve Distribution Company. One of the most popular valves is the Western CS-90 from Western Valve Mfg. which has an annual demand of 7,000 units. The firm is operates 250 days per year. The cost of each valve is $45.56 and the carrying cost is 12% of the purchase price. Based on Monica's evaluation of the cost of ordering any of the valves that they stock, she has come up with an estimated ordering cost of $25 per order. It take about 5 business days from the time an order is placed until it is received. What is the EOQ? What is the reorder point? What is the total inventory cost? If the firm decides to build in a safety stock level of 35 valves, what is the new reorder point and total inventory cost?Explanation / Answer
Given,
Annual demand = 7,000
Operating days per year = 250
Cost per peice = $45.56
Carrying cost = 12% * $45.56
= $5.47
Cost per order = $25
Lead time (days) = 5
1. EOQ = sqrt(2 * Annual demand * Cost per order / Carrying cost)
= sqrt(2 * 7,000 * $25 / $5.47)
= 253
2. Reoder point = (Annual demand / Operating days per year) * Lead time
= (7,000 / 250) * 5
= 140
3. Total inventory cost = Cost per peice * Annual demand + Cost per order * (Annual demand / EOQ) + Carrying cost * (EOQ/2)
= $45.56 * 7,000 + $25 * (7,000 / 253) + $5.47 * (253/2)
= 318,920 + 691.70 + 691.96
= $320,303.66
4. New reorder point = 140 + 35
= 175
New total inventory cost = $320,303.66 + 35 * $45.56
= $321,898.26
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