1. Patterson Electronics supplies microcomputer circuitry to a company that inco
ID: 3141833 • Letter: 1
Question
1. Patterson Electronics supplies microcomputer circuitry to a company that incorporates microprocessors into refrigerators and other home appliances. One of the components has an annual demand of 250 units, and this is constant throughout the year. Carrying cost is estimated to be $1 per unit per year, and the ordering cost is $20 per order. a. To minimize cost, how many units should be ordered each time an order is placed? b. How many orders per year are needed with the optimal policy? c. What is the average inventory if costs are minimized? d. Suppose the ordering cost is not $20, and Patterson has been ordering 150 units each time an order is placed. For this order policy to be optimal, what would the ordering cost have to be?
Explanation / Answer
a)
The EOQ assumptions are met, so optimal order quantity is
EOQ = Q* = Sqrt((2 * Demand * Order cost )/ Holding cost) = sqrt((2*250 *20)/1) = 100 units.
b)
Number of orders per year = Annual Demand /Q = 250/100 = 2.5 orders per year.
Note that this would mean in one year the company paces 3 orders and in the next year it would only need two orders, since some inventory would be carried over from the previous year. It averages 2.5 orders per year.
c)
Average Inventory = Q/2 = 50 units.
d)
Given an annual demand of 250, a carrying cost of $1, and an order quantity of 150,Patterson Electronics must
determine what the ordering cost would have to be for the order policy of 150 units to be optimal.
Q = Sqrt(( 2 * Demand * Order cost) /Holding cost)
150 = sqrt((2* 250*order cost)/1)
Order cost = 150 * 150 / (2*250) = $45
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