INTRO AG HW 3-Edited Insert Table Chart TextShape Media C Estimating Economic Or
ID: 1112043 • Letter: I
Question
INTRO AG HW 3-Edited Insert Table Chart TextShape Media C Estimating Economic Order Quantity and Reorder Point In order the produce beer, RBC requires several inputs including malted barley. RBC needs enough malted barley in stock to be able to quickly respond to demand, but RBC has limited storage space and must sacrifice valuable service area in order to store a large quantity of barley. Complicating the situation further is the high shipping costs associated with waiting until the last minute to order relatively smaller quantities of malted barley. Use the following information to solve for the Economic Order Quantity and the Reorder Point for RBC. P price per unit S = cost of placing an order C carrying cost percentage Q inventory quantity R = annual use C-15% per year R 1200 bags per year S $25 per order $50 per bag 1. What is the inventory quantity that will minimize total inventory cost? Round to the nearest whole number. 2. What are the Carrying Costs (CC), Ordering Costs (OC), and Total Cost (TC) at the inventory quantity estimated in (1)? 3. If it takes 10 days for RBC to receive an order of malted barley, what is the Reorder Point (ROP)? Round to the nearest whole number.Explanation / Answer
1. Economic order quantity = square root of [(2 x demand x ordering costs) ÷ carrying costs] = square root of [(2 x 1200 x 25) ÷ (50*0.15)] = 89 bags per year
where, carrying cost = carrying cost(%) * price per unit
2. At the inventory quantity estimated in the part 1,
Carrying Cost = Quantity * Carrying cost(%) * Price
Carrying Cost = 89*7.5 = $668
Ordering Cost = Cost of placing an order * (Annual demand/Quantity)
Ordering Cost = 25*(1200/89) = $337
Total Cost = [(Price * Annual demand) + (Carrying cost * Quantity)/2 + ((Cost of placing an order * Annual demand)/Quantity)]
Total Cost = [(50*1200) + (7.5*89)/2 + ((25*1200)/89)] = [60,000 + 333.75 + 337.08] = $60,671
3. Reorder Point = Lead time in days * Daily average usage
Reorder Point = 10*(1200/365) = 33 bags
Thus, the inventory manager should place an order before the inventories drop below 33 bags
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