Southeastern Bell stocks a certain switch connector at its central warehouse for
ID: 366447 • Letter: S
Question
Southeastern Bell stocks a certain switch connector at its central warehouse for supplying field service offices. The yearly demand for these connectors is 14,100 units. Southeastern estimates its annual holding cost for this item to be $22 per unit. The cost to place and process an order from the supplier is $72. The company operates 300 days per year, and the lead time to receive an order from the supplier is 3 working days.
a) What is the economic order quantity? (units) (round your response to the nearest whole number).
b) Find the annual holding costs.
c) Find the annual ordering costs.
d) What is the reorder point?
Explanation / Answer
Annual demand (D) = 14100 units
Number of days in a year = 300 days
Average daily demand (d) = D / number of days in a year
= 14100/300
= 47 units
Ordering cost (S) = $72 per order
Holding cost (H) = $22 per unit
Lead time (L) = 3 days
a) Economic order quantity (Q) = sqrt of (2DS / H)
= sqrt of [(2 x 14100 x 72) / 22]
= 303.79 or rounded to 304 units
b) Annual holding cost = (Q /2)H = (304/2)22 = 152x22 = $3344
c) Annual Ordering cost = (D/Q) S = (14100/304)72 = $3339.47
d) Reorder point = d x L = 47 x 3 = 141 units
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