Bart’s Barometer Business (BBB) is a retail outlet that deals exclusively with w
ID: 453896 • Letter: B
Question
Bart’s Barometer Business (BBB) is a retail outlet that deals exclusively with weather equipment. Currently BBB is trying to decide on an inventory and reorder policy for home barometers. These cost BBB $50 each and demand is about 500 per year distributed fairly evenly throughout the year. Reordering costs are $80 per order and holding costs are figured at 20% of the cost of the item.
BBB is open 300 days a year (6 days a week and closed two weeks in August). Lead time is 60 working days.
A) Develop a total cost model for this system.
B) What is the optimal reorder quantity?
C) What is the cycle time?
D) What is the reorder policy for BBB?
E) What total annual cost does the model give?
Explanation / Answer
Annual Demand of Brakes 500
Ordering Cost $80.00
Holding Cost - 20% of Price = 20% * 50 $10.00
a. EOQ = 2AO / H
where A = Annual Demand
O = Ordering Cost per order
H = Holding Cost per unit per annum
EOQ = 2AO / H = (2 * 500 * 80) / 10 = 89.4427
or, 89 units
b
# Orders = Annual Demand / EOQ
= 500 / 89 = 5.62 or 6 orders
Order Cycle Length = 300 days / # Orders
= 300 days / 6 orders
= 50 days/per order
d
Reorder Point = Average Demand During Lead Time
= Average Demand * Lead Time
= 500 units / 300 days * 60 days
= 100 units
e
Total Cost Calculation
Product Cost (500 units * $50 per unit) (A) $25,000.00
Average Inventory ( EOQ/2) (B) 44.5
Holding Cost (C = B * $10) $445.00
Ordering Cost (D = Ordering Cost * No of orders = $80 * 6 $480.00
Total Cost (A+C+D) $25,925.00
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