One of the products sold by OfficeMax is a Hewlett-Packard DeskJet Z4480 printer
ID: 406271 • Letter: O
Question
One of the products sold by OfficeMax is a Hewlett-Packard DeskJet Z4480 printer. As purchasing manager, you have the following information for the printer: What is the economic order quantity for the printer? Calculate annual ordering costs and holding costs (ignoring safety stock) for the EOQ. What do you notice about the two? Suppose OfficeMax currently orders 120 printers at a time. How much more or less would OfficeMax pay in holding and ordering costs per year if it ordered just 12 printers at a time? Show your work. What is the reorder point for the printer? How much of the reorder point consists of safety stock? For parts (e) and (f), use the following formula to consider the impact of safety stock (SS) on average inventory levels and annual holding costs: (Q/2 +SS)H e) What is the annual cost of holding inventory, including the safety stock? How much of this cost is due to the safety stock? Suppose OfficeMax is able to cut the lead time to a constant 1 week. What would the new safety stock level be? How much would this reduce annual holding costs?Explanation / Answer
So we have the following data:
Average weekly demand = 60 printers
Standard deviation = 12 printers
Order lead time = 3 weeks
Item cost that we have = $120
Cost of order = $2
Yearly holding cost per printer = $48
Service level = 99% or z = 2.33
a) EOQ for the system = (2* Annual usage unit)(order cost)/annual carrying cost)
= (2* 60*52 * 2/48) = 16.14 or 17 printers
b) Annual holding cost = orders quantity * holding cost / 2 = 17 * 48/2 =$ 408
Annual Order cost = (Annual demand/ order quantity) *(order cost)
= (52*60/17)*2 = $367
We see that the holding cost is higher than the ordering cost for one year.
c) In case of ordering of 50 printers
Annual holding cost = orders quantity * holding cost / 2 = 50 *48 /2 =$1200
Annual Order cost = (Annual demand/ order quantity) *(order cost)
= (52*60/50)*2 = $124.8
Annual holding cost increases significantly but ordering cost decreases.
d) Reorder point = average demand + z * std deviation
We have 60 + 2.33*12 = 88 approx
Safety stock = 88 – 60 = 28 printers
e) So we have the service level of 99% and z = 2.33
Reorder point = average demand + z * std deviation
So we have demand = 60 in three weeks that is 15 working days
So per day we have = 60/15 = 4
Reorder point = 15 + 2.33 * (0.5) = 16.165
Hence reorder point = 4* 16.165 = 65 approx.
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