Harley Davidson has its engine assembly plant in Milwaukee and its motorcycle as
ID: 412045 • Letter: H
Question
Harley Davidson has its engine assembly plant in Milwaukee and its motorcycle assembly plant in Pennsylvania. Engines are transported between the two plants using trucks. Each truck trip costs $700, regardless of how many engines are loaded onto the truck (assume the truck has unlimited capacity). The motorcycle plant assembles and sells 600 motorcycles each day. Each engine costs $500 and the motorcycle plant incurs a holding cost of $0.274 per engine per day.
1. How many engines should Harley order when they place an order (compute the economic order quantity)?
2. What is the resulting cycle inventory of engines at Harley?
3. How many days are there between two orders?
4. How many orders will the Harley motorcycle plant place per year (assume the plant operates 365 days a year).
5. Compute the annual total controllable cost for the Harley motorcycle plant (annual inventory holding cost plus annual ordering cost).
Explanation / Answer
Given Data:
Ordering cost per order(S) = truck cost per trip = $700
Demand of engines = production per day of motocycle = 600 units/day
Annual Demand(D) = 365*600 = 219000
Cost/Engine (C) = $500
Holding cost (H) = $0.274/day = 0.274*365 = $100 /Year
Solution:
1.How many engines should Harley order when they place an order (compute the economic order quantity)?
EOQ = Sqrt((2*D*S)/H) = Sqrt((2*219000*700)/100) = 1751 Units.
So, whenever Harley place an order, they should order 1751 Units of engines.
2.What is the resulting cycle inventory of engines at Harley?
Cycle inventory = EOQ/2 = 1751/2 = 875.5 ~ 876 Units
3.How many days are there between two orders?
Time between order(TBO) = (EOQ/D)*365 = (1751/219000)*365 = 2.91 ~ 3 Days
Thus, there would be 3 days in between two orders.
4.How many orders will the Harley motorcycle plant place per year (assume the plant operates 365 days a year).
Number of orders placed per year = D/EOQ = 219000/1751 = 125 Orders
5.Compute the annual total controllable cost for the Harley motorcycle plant (annual inventory holding cost plus annual ordering cost).
Total controllable cost = Annual Inventory holding cost+ Annual Ordering cost
= ((EOQ/2)*H) + ((D/EOQ)*S) = ((1751/2)*100)+((219000/1751)*700)
= $175,100
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