Ergonomics Inc. sells ergonomically designed office chairs. The company has the
ID: 393302 • Letter: E
Question
Ergonomics Inc. sells ergonomically designed office chairs. The company has the following information:
Average demand = 36 units per day
Average lead time = 50 days
Item unit cost = $70 for orders of less than 400 units
Item unit cost = $68 for orders of 400 units or more
Ordering cost = $45
Inventory carrying cost = 25%
The business year is 250 days
Assume there is no uncertainty at all about the demand or the lead time.
a. Calculate EOQ if unit cost is $70 and $68. (Note: These EOQs do not need to be feasible in their price range.) (Round up your answers to the next whole number.)
Unit cost at $70 __________units.
Unit cost at $68__________units.
b. Calculate annual ordering costs for each alternative? (Round your answers to 2 decimal places.)
Unit cost at $70 ________ units.
Unit cost at $68 ________ units.
c. Calculate annual inventory carrying costs for each alternative? (Round your answers to 2 decimal places.)
Unit cost at $70 __________ units.
Unit cost at $68 __________ units.
d. Calculate annual product costs for each alternative?
unit cost at $70 __________ units.
unit cost at $68 ___________ units.
e. What will be the total costs for each alternative? (Round your answers to 2 decimal places.)
unit cost at $70 _________ units.
unit cost at $68 _________ units.
f. Based on your analysis, how many chairs should they order at a time? (Round your answers to 2 decimal places.)
order quantity __________ chairs.
g. How much the firm can save annually by using the order quantity in Part f. instead of the first EOQ shown in Part a? (Round your answer to 2 decimal places.)
amount saved __________ ?
Explanation / Answer
a)
EOQ = Sqrt((2*D*S)/H)
D = Annual demand = 250*36 = 9000 units
S = Ordering cost = $45
Inventory carrying cost = 25% of unit cost
When unit cost is $70,
EOQ = Sqrt((2*9000*45)/(0.25*70)) = 215.14 = 216 (rounding)
When unit cost is $68,
EOQ = Sqrt((2*9000*45)/(0.25*68)) = 218.28 = 219(rounding)
b)
Annual ordering cost at $70 = (9000/216)*45 = $1875
Annual ordering cost at $68 = (9000/219)*45 = $1849.32
c)
Annual inventory carrying costs at $70 = (216/2)*0.25*70 = $1890
Annual inventory carrying costs at $68 = (219/2)*0.25*68 = $1861.5
d)
Annual products cost at $70 = 9000*70 = $630000
Annual product costs at $68 = 9000*68 = $612000
e)
Total costs at $70=630000+1890+1875 = $633765
Total costs at $68 = 612000+1861.5+1849.32 = $615710.82
f)
Order quantity = 219 chairs
g)
Amount saved = $633765- $615710.82 = $18054.18
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