Westside Auto purchases a component used in the manufacture of automobile genera

Question

Westside Auto purchases a component used in the manufacture of automobile generators directly from the supplier. Westside’s generator production operation, which is operated at a constant rate, will require 1000 components per month throughout the year (12,000 units annually). Assume that the ordering costs are $25 per order, the unit cost is $2.50 per component, and annual holding costs are 20% of the value of the inventory. Westside has 250 working days per year and a lead time of 5 days.

For Problem 4 of Chapter 10, we determined that the EOQ was equal to 1095.45 units. Management at that firm thinks the number itself might be difficult to operationalize. They are considering using an order quantity of Q=1100 or 1000.

A) Evaluate each of these two options in terms of the effect on the holding, ordering, and total costs.
B) Then provide management with related advice. Should they opt against the EOQ? Why or why not?

Explanation / Answer

a) EOQ = 1095.45

If 1000 is used

Holding cost=1000/2*0.2*2.5=250

Orderin cost=12000/1000*25=300

Total=550

If 100 is used,

HC=1100/2*0.2*2.5= 275

Ordering cost=12000/1100*25=272.72

Total=547.72

b) Yes, they should opt against EOQ as sepcific fractional numbers are difficult to order and suppliers may be unwilling. They should opt for 1100 size

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