16-15. (Comprehensive EOQ calculations) Knutson Products Inc. is involved in the

Question

16-15. (Comprehensive EOQ calculations) Knutson Products Inc. is involved in the production of airplane parts and has the following inventory, carrying, and storage costs:

1. Orders must be placed in round lots of 100 units.

2. Annual unit usage is 250,000. (Assume a 50-week year in your calculations.)

3. The carrying cost is 10 percent of the purchase price.

4. The purchase price is $10 per unit.

5. The ordering cost is $100 per order.

6. The desired safety stock is 5,000 units. (This does not include delivery-time stock.)

7. The delivery time is 1 week.

Given the forgoing information:

a. Determine the optimal EOQ level.

b. How many orders will be placed annually?

c. What is the inventory order point? (That is, at what level of inventory should a new order be placed?)

d. What is the average inventory level?

e. What would happen to the EOQ if annual unit sales doubled (all other unit costs and safety stocks remaining constant)? What is the elasticity of EOQ with respect to sales? (That is, what is the percentage change in EOQ divided by the percentage change in sales?)

f. If carrying costs double, what will happen to the EOQ level? (Assume the original sales level

of 250,000 units.) What is the elasticity of EOQ with respect to carrying costs?

g. If the ordering costs double, what will happen to the level of EOQ? (Again assume original levels of sales and carrying costs.) What is the elasticity of EOQ with respect to ordering costs?

Explanation / Answer

a) EOQ = sqrt(2AD/H) = sqrt(2 * 250000 * 100 / (10 * 0.1)) = 7071 = 7100 (round lots of 100)

b) total orders = 250000/7100 = 35.2 = 36

weekly consumption = 250000/50 = 5000

c) Order Point = safty stcok + inv for delivery time = 5000 + 5000 = 10,000

d) avg level = 10000 + 7100/2 = 13550

e) new EOQ = 10000

   elasticity = (10000 - 7100) /(7100 * 2) = 0.204

f) EOQ = 5000

   e = 2100/7100 * 2 = 0.148

g) EOQ = 10000

   e = 0.204

h) EOQ = 5000

   e = 0.148

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