The A&M Hobby Shop carries a line of radio-controlled model racing cars. Demand
ID: 2757941 • Letter: T
Question
The A&M Hobby Shop carries a line of radio-controlled model racing cars. Demand for the cars is assumed to be constant at a rate of 25 cars per month. The cars cost $57 each, and ordering costs are approximately $12 per order, regardless of the order size. The annual holding cost rate is 22%. Determine the economic order quantity and total annual cost under the assumption that no backorders are permitted. If required, round your answers to two decimal places. Q* = Total Cost = $ Using a $48 per-unit per-year backorder cost, determine the minimum cost inventory policy and total annual cost for the model racing cars. If required, round your answers to two decimal places. S* = Total Cost = $ What is the maximum number of days a customer would have to wait for a backorder under the policy in part (b)? Assume that the Hobby Shop is open for business 300 days per year. If required, round your answer to two decimal places. Length of backorder period = days Would you recommend a no-backorder or a backorder inventory policy for this product? Explain. If required, round your answers to two decimal places. Recommendation would be backorder inventory policy, since the maximum wait is only days and the cost savings is $ . If the lead time is six days, what is the reorder point for both the no-backorder and backorder inventory policies? If required, round your answers to two decimal places. Reorder point for no-backorder inventory policy is . Reorder point for backorder inventory policy is .
Explanation / Answer
Solution:
Demand of Car = 25 Cars per month
Annual Demand of Cars = 25 x 12 = 300 Cars
Cost of a Car = $57
Ordering Cost per Order = $12
Holding Cost per Unit per annum = 22% x $57 = $12.54
(i) Economic Order Quantity (EOQ)
EOQ = [ (2 x Annual Demand x Ordering Cost per Order) / Holding Cost per unit per annum ]1/2
= [ (2 x 300 x 12) / $12.54 ] 1/2
= 23.96 or 24 Cars
Economic Order Quantity = 24 Cars
(ii) Total Annual Cost = Total Cost of Car + Total Ordering Cost + total Holding cost
Total Cost of Car = 300 Cars x $57 = $17,100
Total Ordering Cost = No. of Order x Ordering Cost per Order
No. of Orders = Annual Demand / EOQ = 300 / 24 = 12.5 or we can say 13 Orders
Total Ordering Cost = 13 orders x $12 = $156
Total Holding Cost = ½ x EOQ x Holding Cost per unit per annum = ½ x 24 x $12.54 = $150.48
Total Annual Cost = $17,100 + $156 + $150.48 = $17,406.48
It is to be noted that at economic order quantity total ordering cost equals to total holding cost. Since there is only 12.5 orders and we assumed it in nearest whole number i.e. 13 orders. Therefore total cost of ordering and holding is little bit difference.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.