(28-3) Start with the partial model in the file Ch28 P03 Build a Model.xls on th
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Question
(28-3) Start with the partial model in the file Ch28 P03 Build a Model.xls on the textbook’s Web site. The following inventory data have been established for the Adler Corporation. (1) Orders must be placed in multiples of 100 units. (2) Annual sales are 338,000 units. (3) The purchase price per unit is $3. (4) Carrying cost is 20% of the purchase price of goods. (5) Cost per order placed is $24. (6) Desired safety stock is 14,000 units; this amount is on hand initially. (7) Two weeks are required for delivery. a. What is the EOQ? b. How many orders should the firm place each year? c. At what inventory level should a reorder be made? Hint: Reorder point = (Safety stock + Weeks to deliver × Weekly usage) Goods in transit. d. Calculate the total costs of ordering and carrying inventories if the order quantity is (1) 4,000 units, (2) 4,800 units, or (3) 6,000 units. What are the total costs if the order quantity is the EOQ? e. What are the EOQ and total inventory costs if the following were to occur? (1) Sales increase to 500,000 units. (2) Fixed order costs increase to $30; sales remain at 338,000 units. (3) Purchase price increases to $4; sales and fixed costs remain at original values.
Explanation / Answer
a. What is the EOQ?
EOQ = (2CO/i)^(1/2)
EOQ = (2*338000*24/(24%*3))^(1/2)
EOQ = 4746.93
EOQ = 4800 Units (rounded up to 100 unit)
b. How many orders should the firm place each year?
No of order should firm place = Annual Demand/EOQ
No of order should firm place = 338000/4800
No of order should firm place = 70.41
No of order should firm place = 71 order approx
c. At what inventory level should a reorder be made? Hint: Reorder point = (Safety stock + Weeks to deliver × Weekly usage) Goods in transit.
Reorder point = (Safety stock + Weeks to deliver × Weekly usage)
Reorder point = (14000 + 2*338000/52)
Reorder point = 27000 Units
d. Calculate the total costs of ordering and carrying inventories if the order quantity is
(1) 4,000 units,
Total costs of ordering and carrying inventories = 20%*3 * (4000/2 + 14000) + 338000/4000 * 24
Total costs of ordering and carrying inventories = $ 11628
(2) 4,800 units,
Total costs of ordering and carrying inventories = 20%*3 * (4800/2 + 14000) + 338000/4800 * 24
Total costs of ordering and carrying inventories = $ 11530
or (3) 6,000 units.
Total costs of ordering and carrying inventories = 20%*3 * (6000/2 + 14000) + 338000/6000 * 24
Total costs of ordering and carrying inventories = $ 11552
What are the total costs if the order quantity is the EOQ?
Total costs of ordering and carrying inventories = 20%*3 * (4800/2 + 14000) + 338000/4800 * 24
Total costs of ordering and carrying inventories = $ 11530
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