Your company manufactures the gearing system used to close and retract an automo

Question

Your company manufactures the gearing system used to close and retract an automobile sun roof. Each gearing system has a value of $1250. The company you supply requires 800 gearing systems per year. Because of the time required to review your inventory and the mechanism changes needed for minor changes on the gearing systems you provide to different customers your set up cost per order is $600. Warehouse storage of undelivered gearing systems based on your desired rate of return and utilities is 0.15 of the value. Compute the best economic order quantity and the number of orders per year that would be best from your point of view. Q [(AU)(SU)(2/(H)(PV))12

Explanation / Answer

Economic order quantity = (2*annual demand*ordering cost/storage cost)^.5

Economic order quantity = (2*800*600/(.15*1250))^.5

Economic order quantity = 71.55 or 72 units of gearing system

Number of orders per year = Annual demand/Economic order quantity

Number of orders per year = 800/71.55

Number of orders per year = 11.18 or 11 orders per year

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