For this assignment, you will calculate the EOQ and reorder point for each of th
ID: 430446 • Letter: F
Question
For this assignment, you will calculate the EOQ and reorder point for each of the book types. Lead time for any type of book is 5 weeks.
Assume the demand data given in the spreadsheet below is normally distributed. The accounting department estimates the average costs for A, B, and C books to be $5.05, $7.39, and $10.25, respectively, for a single copy. It costs 45% per year, per unit, for annual holding costs. The batch size is 3,500 for an A book, 1,000 for a B book, and 500 for a C book. The administrative cost for ordering a batch of a book has been estimated to be $125.
What is your recommendation for each type of book? Why? How much safety stock should be held, by type of book? What is the total cost of your recommendation? What are the advantages and disadvantages of each option? Use excel.
0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0000O ?517 8. 9 0 1 1 2 3 9 4 0 7 7 3 4 0 0 1 2 3 9 5 1 6 2 8 9 9 5 2 2 3 4 0 5 6 7 3 9 5 6 1 2 3 4 4 5778 757, 7 7 8 8 3 8 3 5 8 6 3 8 6 6 9 9 4 9 4 6 9 7 9 7 4 9 4 7 0 0 0 5 8 5 5 0 8 588111616161 1 2 1 2 d s 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4 7 4 5 8 9 3 4 2 8 7 2 2 4 0 4 7 9 0 3 7 3 2 2 6 3 9 3 9 2 1 9 6 8 6 6 8 6 5 6 589987981618 54340305367, 1 7 5 4 5 4 6 2 5 8 4 3 0 0 7 3 0 1 9 5 8 4 3 8 1 4 2 7 3 1 1 8 5 7 4 9 6 7 490 1111112111121111122212222222222222222323332323232333 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0000O o 7 2 5 9 6 4 2 1 2 9 2 5 9 5 1 4 1 2 5 1 5 7 9 7 7 9 5 7 4 2 9 8 6 3 3 9 2 8 1 3 9 3 1 6 0 2 3 9 114 2165928410805237, 8 4 5 3 4 9 6 8 7 4 1 6 8 9 6 8 2 2 5 5 2 3 8 19230685309 55.5 4 3 5 5 5 5 6 2 6 3 3 5 5 3 6 3 6 5 4 4 3 3 4 5 5 6 3 5 4 5 4 3 6 4 476463466466454 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 !111111111222222222233333333334444444444555 123456789Explanation / Answer
THE BOOK TYPE A
Annual Demand = 26,520 units so D = 26,520
H= annual holding cost - 0.45x $5.05 = $2.2725
S = ordering cost = $125
Calculate EOQ = SQRT of 2*D *S/H
EOQ for A = 1708 units
Total cost for A is provided by following formula:
TC= D/Q*S + Q/2*H
TC = 26,520/1708 * 125 + 1708/2 * 2.2725 = 1940.87 + 1940.72 = $3881.59
To the calculate reorder point, R=dL
R = 510 x 5 = 2550 (510 is average weekly demand calculated via spreadsheet & 5 is lead time in weeks).
To calculate safety stock for book type A, daily average demand is multiplied by lead time, 5 weeks in this example. Daily average demand is 73.6 units. Therefore, 73.6 x 35 days will result in a safety stock level of 2, 576. In terms of safety stock, a 50% rule may be applied whereby lead time is multiple by 50% of daily demand figure, equaling 1277.5. I would recommend carrying safety stock of 1277 based on 50% rule because it will provide adequate stock levels while at same time limiting inventory carrying costs of 45% in this case. advantage of carrying entire safety stock level is that company is protected against an unexpected decrease in inventory & so orders will be filled. disadvantage to meeting safety stock number is additional holding cost incurred. . Based on these factors, I believe 50% rule is a good & prudent compromise that allows inventory to be met while keeping costs low.
THE BOOK TYPE B
Calculations for the book type B will be same as A, but numbers will change based on cost of each book & demand number is lower.
S= $125
D= 12,278 units
H = .45 x $7.39 = $3.325
SQRT of 2*D *S/H
EOQ= 960.81 or961 units
The total cost for book type B:
TC= D/Q*S + Q/2*H
TC = 12,278/961*125 + 961/2*3.325
TC = $1,597 + $1,598 = $3,195
To the calculate reorder point, R=dL
R = 236 x 5 = 1,180 (236 is average weekly demand calculated via spreadsheet & 5 is lead time in weeks).
Safety Stock = 33.6 x 35 days = 1177 units
As was case with book type A, I would recommend 50% rule & carry half of 1,177 safety stock figure. Rule in case of book type B will be more effective because holding cost for book type B is higher than book type A. Also, by maintaining a safety stock, inventory orders will be met while maintaining low cost figures.
THE BOOK TYPE C
Calculations for the book type C will be same as A & B, but numbers will change based on cost of each book & demand number is lower.
D= 8,104 units
S= $125
H = .45 x $10.25 = $4.61
SQRT of 2*D *S/H
EOQ= 662.9 or 663 units
The total cost for book type C:
TC= D/Q*S + Q/2*H
TC = 8,104/663*125 +663/2*4.61
TC = $ + $1,527.9 + 1528.2 = $3,056.10
To the calculate reorder point, R=dL
R = 156 x 5 = 780 (156 is average weekly demand calculated via spreadsheet & 5 is lead time in weeks).
Safety Stock = 22.2 x 35 days = 777 units
As was case with book type A & B, I would recommend 50% rule carry half of 777 safety stock figure. Rule in case of book type C will be more effective because holding cost for book type C is higher than book type A & B. Therefore, in this case it can be worth dropping safety stock because of higher holding costs, although inventories must still be met.
In each case safety stock levels should be maintained while at same time trying to limit holding cost. Although holding costs figures are impactful, risk of not having adequate inventory & being unable to meet demand in a timely fashion may have long-term consequences in terms of customer satisfaction & may ultimately damage brand. It is important to factor in each variable to determine appropriate path.
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