2. Harry Joe’s machine shop uses 2500 brackets during the course of a year. Thes
ID: 360333 • Letter: 2
Question
2. Harry Joe’s machine shop uses 2500 brackets during the course of a year. These brackets are purchased from a supplier 90 miles away. The following information is known about the brackets: Annual Demand 2500 Holding cost per bracket per year $1.80 Order cost per order $15.00 Lead Time 4 days Working days per year 250 a) Given the above information, what would be the economic order quantity (EOQ)? b) Given the EOQ, what would be the average inventory? What would be the annual inventory holding cost? c) Given the EOQ, how many orders would be made each year? What would be the annual order cost? d) Given the EOQ, what is the total annual cost of managing the inventory? e) What is the time between orders? f) What is the reorder point (ROP)?
Explanation / Answer
Annual demand (D) = 2500 brackets
Ordering cost (S) = $15
Holding cost (H) = $1.80
Lead time (L) = 4 days
Working days per year = 250
Daily demand (d) = D/working days per year = 2500/250 = 10 brackets
a) Economic order quantity (Q*) = sqrt of (2DS /H)
= sqrt of [(2x2500x15) / 1.80]
= 204.12
b) Average inventory = (Q*/2) = 204.12/2 = 102.06
Annual inventory holding cost = (Q*/2)H = (204.12/2)1.80 = 102.06 x 1.80 = $183.71
c) Number of order per year = D/Q*= 2500/204.12 = 12.25
Annual order cost = (D/Q*) S = (2500/204.12)15 = 12.25 x 15 = $183.75
d) Total annual cost of managing inventory = holding cost + ordering cost
= $183.71 + $183.75
= $367.46
e) Time between orders = number of working days per year / number of orders per year
= 250/ 12.25
= 20.41 days
f) Reorder point = d x L = 10 x 4 = 40 days
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