6) Recall Prince Pots from question 5 (please see question 5 below). Use the fol

ID: 453864 • Letter: 6

Question

6) Recall Prince Pots from question 5 (please see question 5 below). Use the following information to answer the ensuing questions. Demand for pots is 26 pots a day. There are 260 working days in a year. It costs $65 to carry a pot in the warehouse over an entire year. Each order for pots cost $72. (a) Prince Pots is tooling around with a different idea of running a production facility to provide sheet metal for the pots. There are associated costs with running a production facility. Prince can produce 200 or less sheets of metal for $7 a piece. He can produce between 201 and 500 for $6 a sheet, and over 500 for $5 a sheet. How many sheets should Prince ask the production facility to produce in any given order? Interpret the costs for this EOQ. (b) Prince has found that the production facility can produce 35 sheets of metal a day. Assuming the demands given before part (a), how does the EOQ change from what is found in #5? Why did the EOQ change (in your own words)? (Part (a) has nothing to do with this question)

Please refer to Question #5 below:

5) Prince Pots produces pots and pans aplenty. The manufacturing process at Prince Pots involves taking a flat sheet of steel and stamping it into a pot. Keeping inventory on-hand to stamp pots, as well as moving inventory, is an ongoing issue, one which Prince hopes you can help with. Use the following information to answer the ensuing question. Demand for pots is 26 pots a day. There are 260 working days in a year. It costs $65 to carry a pot in the warehouse over an entire year. Each order for pots cost $72. (a) Determine the economic order quantity. (b) What is the average number of pots on hand? (c ) How many orders per year will there be? (d) Report the costs associated with carrying the pots in the warehouse and the costs for ordering materials for the pots. In addition, explain how these numbers were attained from the analysis. (e ) Suppose that Prince wishes for there to be a lead time of 3 days (i.e. supply arrives 3 days before the inventory runs to zero). How many items on-hand will there be when it is time to re-order?

Explanation / Answer

) Prince Pots produces pots and pans aplenty. The manufacturing process at Prince Pots involves taking a flat sheet of steel and stamping it into a pot. Keeping inventory on-hand to stamp pots, as well as moving inventory, is an ongoing issue, one which Prince hopes you can help with. Use the following information to answer the ensuing question.

Demand for pots is 26 pots a day.

There are 260 working days in a year.

It costs $65 to carry a pot in the warehouse over an entire year.

Each order for pots cost $72.

(a) Determine the economic order quantity.

EOQ = sqrt (2* D*S/H) = sqrt(2*6760*72/65) = 122.38 pots units

Annual demand D= 26* 260 pots = 6760 pots

Ordering cost S = $ 72 per order

Holding cost H = $ 65 per unit per annum

Number of working days in a year is 260 day

(b) What is the average number of pots on hand?

average inventory = Q / 2 = 122.38/2 = 61.19 pots

where Q = EOQ

(c ) How many orders per year will there be?

optimal number of order per year = annual demand / EOQ = 6760/122.38 = 55.24 orders

(d) Report the costs associated with carrying the pots in the warehouse and the costs for ordering materials for the pots. In addition, explain how these numbers were attained from the analysis.

Annual total cost = total ordering cost + total carrying cost

= (D/Q)* S + (H*Q)/2 = (6760/122.38)*72 + (65*122.38)/2 = $7954.47

The optimal order quantity occurs at the point where the total cost curve is at a minimum, which coincides exactly with the point where the carrying cost curve intersects the ordering cost curve. This enables us to determine the optimal value of Q by equating the two cost functions and solving for Q. therefore an optimum balance between two gives the EOQ.

(e ) Suppose that Prince wishes for there to be a lead time of 3 days (i.e. supply arrives 3 days before the inventory runs to zero). How many items on-hand will there be when it is time to re-order?

This is known as reorder point. Lead time is 3 day, if demand and lead time are both constant, the reorder point is simply

Daily demand * lead time = 26 * 3 =78 pots