The weekly requirement of a part is 580 units. The order cost is $95 per order.
ID: 444250 • Letter: T
Question
The weekly requirement of a part is 580 units. The order cost is $95 per order. The holding cost is $5 per unit per year, and the part cost is $950 per unit. The firm operates fifty-two weeks per year.
1. Calculate the following - Economic order quantity, annual holding cost, annual order cost and the annual inventory holding cost.
2. Suppose the firm is currently ordering once every four weeks (i.e., orders what is needed to meet the demand over next four weeks at a time). How much can the company save per year by using economic order quantity instead?
Explanation / Answer
1. ) Economic order quantity =( 2 x order cost / Holding cost * demand ) ^ 0.5
= ( 2 * 95 / 5 * 580 ) ^ 0.5 = 148.46 = 148 units
We round off to 4 orders per week, with each order of 145 units.
Annual holding cost = (145 x 4 - 580 ) x 52 x 5 = 0 $
Annual order cost = 4*95*52 = 19760 $
2) If firm is currently giving 1 order every 4 week, with each order of 580 x 4 = 2320 units.
Annual holding cost = 52* (( 2320 - 580 ) * 1/52 * 5 + (2320 -580*2) * 2/52 * 5 + (2320 - 580*3) * 3/52 * 5)) = 29000 $
Annual order cost = 1/4*95*52 = 1235 $
Total saving by following economic order quantity = 1235 +29000-0-19760 = 10475 $
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