\"José runs a mail-order business for gym equipment from his house in Dorado. An
ID: 455009 • Letter: #
Question
"José runs a mail-order business for gym equipment from his house in Dorado. Annual demand for the PuertoFlexers (the best seller) is 25,000 in the US. Assume that the year has 360 days. He sells each product for $350, earning a markup of 20%, including shipping and handling to the US. The annual holding cost per unit is $5.50 and the cost to process an order is $25. It takes ten days to completely process an order. (Write down any assumption that you have to make.)
What are the EOQ and Total Cost of this situation?
How long does a "cycle time" (the time between having all eoq quatitites and zero) last?
If José has space for 545 products, can all be stored in his facilities?
If José expect demand to rise by 10% next year, does he has to make any arrangements?
Explanation / Answer
Annual demand = 25,000
therefore, daily demand = 25000/360 = 69.44 70
Profit per product = 20% of $350 = $70
Purchase cost = $ 280 per product
EOQ = 2*D*S/H
where D= Annual Demand = 25000
S= Cost per order = $25
C= Cost per unit = $5.5
I= 5 %.....I have assumed the risk free rate
H= C*I = 5.5 * 1.05 = 5.775
EOQ = 2*25000*25/5.775 = 465.24 465 units
Total holding cost = EOQ * C = 465*5.5 = $ 2557.5
NOw, EOQ = 465, daily demand = 70, cycle time = 465 /70 = 6.64 days
Since EOQ is less than the space of 545, all can be stored in his facilities
With 10% rise in demand, new demand = 25000*1.1 = 27500
new EOQ = 2*27500*25/5.775 = 487.95 488 units
which is still less than the total space of 545 products, so José does not need to make any arrangements.
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