Office One Super Store sells office furniture, equipment, supplies and business
ID: 347865 • Letter: O
Question
Office One Super Store sells office furniture, equipment, supplies and business technology for small businesses and home offices. The company sells 5600 file cabinets per year, 60% of which are imported from Canada. All the imported file cabinets are purchased from a single supplier at a cost of $40 each. The shop calculates annual holding cost as 20% of unit cost per year. The set up cost for placing an order is estimated to be $350.
a) Determine the optimal number of file cabinets to order (EOQ) each time an order is placed, the time between placement of orders and the total annual cost incurred by the store for the imported cabinets.
b) If store has to order in multiples of 40, what order size should it choose? What is the percentage increase in the total annual cost from using this new order quantity compared to the original EOQ?
c) If the replenishment lead time is three weeks, what is the reorder point based on the level of on-hand inventory?
d) The current reorder policy is to buy file cabinets only once every four months. What is the additional total annual cost incurred by this policy compared to using the original EOQ?
Explanation / Answer
a. Quantity of cabinets that are imported = 60% of 5600 = 3360
Annual holding cost = 20% of $40 = $8. Set up costs for placing an order = $350
Thus EOQ = (2*3360*350/8)^0.5
= 542.22 or 542 (rounded off)
No. of orders = Quantity required in a year/EOQ = 3360/542.2 = 6.20 orders per year. Thus time between placement of orders = 365 days in a year/6.20 orders = 58.90 days
Total annual costs = purchase costs+ordering costs+holding costs
Purchase costs = 3360*40 = 134,400
Ordering costs = 350*(3360/542.22) = 2168.87
Carrying costs = (542.22/2)*8 = 2168.87
Thus total costs = 134400+2168.87+2168.87 = $138,737.74
b. If the store has to order in multiples of 40 then it will order 542/40 = 13.55. This will be rounded off to 14. Thus it will order = 14*40 = 560 at a time.
Purchase costs = 3360*40 = 134,400
Ordering costs = 350*(3360/560) = 2100
Carrying costs = (560/2)*8 = 2240
Total costs = 134400+2100+2240 = 138,740
Increase in costs = 138740-138737.74 = $2.26
c. Average weekly sales = annual sales/52 weeks = 3360/52 = 64.62. Thus demand for 3 weeks = 3*64.62 = 193.85. Thus re-order point = 193.85 (or 194 rounded off)
d. Current policy is to buy file cabinets once every 4 months or 12/4 = 3 orders per year.
Quantity per order = 3360/3 = 1120
Cost of ordering = 350*3 = 1050
Holding cost = 1120/2*8 = 4480
Purchase cost = 134400. Total = 1050+4480+134400 = $139,930
Increase = 139,930-138,737.74 = $1,192.26
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