Johnson Memorial Hospital is a 230-bed not-for-profit acute care hospital. The f
ID: 2797527 • Letter: J
Question
Johnson Memorial Hospital is a 230-bed not-for-profit acute care hospital. The financial manager of the hospital is applying economic ordering quantity (EOQ) to manage the hospital’s inventory. For one specific blood product, there are two suppliers A and B. Data of the two supplier, together with the inventory carrying cost and other data is as followed: Expected Annual Usage 92 Units
Inventory Carrying Cost 25%
1) Compare the economic ordering quantity and how many orders to be placed each year for supplier A and supplier B. (5 points) 2) Compare the total inventory cost with supplier A and supplier B.
Supplier A Supplier B Unit Cost $66 $60 Ordering Cost $50 $75Explanation / Answer
For Supplier A,
Quantity = 92 per year
Unit Cost = 66
Order Cost = 50
Carrying Cost Per order = Cost Per Unit* %Carrying Cost = 66*25% = 16.5
EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)
EOQ = SQRT(2*92*50/16.5) = 23.6 = 24
Invetory Cost = Carrying Cost Per Unit* Avg. Unit in Stock = 16.5*24/2=$198
For Supplier B,
Quantity = 92 per year
Unit Cost = 60
Order Cost = 75
Carrying Cost Per order = Cost Per Unit* %Carrying Cost = 60*25% = 15
EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)
EOQ = SQRT(2*92*75/15) = 30.3 = 31
Invetory Cost = Carrying Cost Per Unit* Avg. Unit in Stock = 15*31/2=$232.5
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