Ergonomics Inc. sells ergonomically designed office chairs. The company has the
ID: 361140 • Letter: E
Question
Ergonomics Inc. sells ergonomically designed office chairs. The company has the following information:
Average demand = 22 units per day
Average lead time = 38 days
Item unit cost = $58 for orders of less than 280 units
Item unit cost = $56 for orders of 280 units or more
Ordering cost = $33
Inventory carrying cost = 25%
The business year is 250 days
Assume there is no uncertainty at all about the demand or the lead time.
1) Calculate EOQ if unit cost is $58 and $56. (Note: These EOQs do not need to be feasible in their price range.)
Item unit cost = $58
Item unit cost = $56
2) Calculate annual ordering costs for each alternative?
Item unit cost = $58
Item unit cost = $56
3) Calculate annual inventory carrying costs for each alternative?
Item unit cost = $58
Item unit cost = $56
4) Calculate annual product costs for each alternative?
Item unit cost = $58
Item unit cost = $56
5) What will be the total costs for each alternative?
Item unit cost = $58
Item unit cost = $56
6) Based on your analysis, how many chairs should they order at a time?
7) How much the firm can save annually by using the order quantity in Part f. instead of the first EOQ shown in Part a?
Explanation / Answer
Let, D = annual demand = 22 x 250 = 5500
U = unit cost = 58 (if order < 280 units), 56 (if order >= 280)
C = Order cost = $33
H = inventory carrying cost = 25%
EOQ at $58: Sqrt (2 x 5500 x 33/ 58 x .25) = 158 units
EOQ at $56: Sqrt (2 x 5500 x 33/ 56 x .25) = 161 units
TAC of ordering at 158 units:
Annual ordering cost = 33(5500/158) = $1148.4
Annual inventory carrying cost = 58 x .25 (158/2) = $1145.5
Annual Product cost = 58 x 5500 = $319,000
Total Cost = $321,294
TAC of ordering 161 units:
Annual ordering cost = 33(5500/ 161) = 1127.3
Annual inventory carrying cost = 56 x .25 (161/2) = $1127
Annual Product cost = 56 x 5500 = $308,000
Total cost = $310,254
Therefore, 161 chairs should be ordered at a time.
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