Kim Clark has asked you to help him determine the best ordering policy for a new
ID: 368714 • Letter: K
Question
Kim Clark has asked you to help him determine the best ordering policy for a new product. The demand for the new product has been forecasted to be about 1000 units annually. To help you get a handle on the carrying and ordering costs, Kim has given you the list of last year's costs. He thought that these costs might be appropriate for the new product.
Kim Clark has asked you to help him determine the best ordering policy for a new product. The demand for the new product has been forecasted to be about 1,000 units annually. To help you get a handle on the carrying and ordering costs, Kim has given you the list of last year's costs. He thought that these costs might be appropriate for the new product. Cost ($) 320 2,750 30,000 12,800 800 500 300 1,000 Cost ($) Cost Factor Cost Factor Taxes for the warehouse Receiving and incoming inspection New product development Acct. dept. costs to pay invoices Inventory insurance Product advertising Spoilage Sending purchasing orders 1,900 Warehouse supplies 1,450 Research and development 2,500 Purchasing salaries & wages 500 Warehouse salaries & wages 600 Pilferage of inventory 800 Purchase order supplies 7 50 Inventory obsolescence 750 Purchasing dept. overhead He also told you that these data were compiled for 10,000 inventory items that were carried or held during the year. You have also determined that 250 orders were placed last year. Your job as a new operations management graduate is to help Kim determine the economic order quantity for the new product. EoQunits (round your response to the nearest whole number) Fnter vour answer in the answer hox and then click Check AnswerExplanation / Answer
Step1: We segregate the Holding cost and Ordering cost.
Holding costs are following
Warehouse taxes = 1900
Inventory Insurance = 600
Spoilage = 750
Warehouse supplies = 320
Warehouse salaries & wages = 12800
Pilferage of inventory = 800
Inventory Obsolescence = 300
Total = (1900 + 600 + 750 + 320 + 12800 + 800 + 300) = 17470
Average Holding cost per item, H = 17470 / 10000 = 1.747
Ordering costs are following
Acct. dept cost to pay invoices = 500
Sending purchase orders = 750
Purchasing salaries & wages = 30000
Purchase order supplies = 500
Purchasing dept overhead = 1000
Total costs = (500 + 750 + 30000 + 500 + 1000) = 32750
Total number of orders per year = 200
Average ordering cost, S = 32750 / 200 = 163.75
Annual Demand, D = 1000
EOQ = (2SD/H) = (2*163.75*1000/1.747) = 433 units
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