Economic order quantity: equation approach; effects of JIT purchasing: manufactu
ID: 2491118 • Letter: E
Question
Economic order quantity: equation approach; effects of JIT purchasing: manufacturer Rally Communications Company manufactures glass fibres used in the communications industry. The company's materials and parts manager is currently revising the inventory ordering policy for XL-20, one of the chemicals used in the production process. The chemical is purchased in 10-kilogram canisters for $190 each. The firm uses 4800 canisters per year. The accountant estimates that the incremental costs of ordering and receiving XL-20 are $300 per order. The annual cost of storing XL-20 is $8 per canister
Required: 1 Use the EOQ formula to determine the optimal order quantity for XL-20. (2 Marks)
2 What is the total annual cost of ordering and storing XL-20 at the economic order quantity? (2 Marks)
3 How many orders will be placed per year? (2 Marks)
4 Rally's accountant, Frank Mallard, recently attended a seminar on JIT purchasing. Afterwards, he analysed the cost of storing XL-20, including the cost of wasted space and inefficiency. He was shocked to find that the real annual carrying cost was $40 per canister. Mallard then met with Doug Kaplan, Rally's purchasing manager. Together they contacted Chemical Industries, the supplier of XL-20, about a JIT purchasing arrangement. After some discussion and negotiation, Kaplan concluded that the cost of placing an order for XL-20 could be reduced to just $60.
(a) Calculate the new EOQ for XL-20. (2 Marks)
(b) How many orders will be placed per year? (2 Marks)
Explanation / Answer
Answer:1
EOQ=Square root of (2AO/C)
=Square root of (2*4800*300/8)
=600
Answer:2 Total annual cost of orderingand storing XL-20:
=(4800/600)*300+(600/2)*$8
=4800
Answer:3 Orders per year:
Number of orders per year=Annual req/Order Quantity
=4800/600=8 order per year
Answer:4 EOQ= square root of ([2*4800*60)/$40]
=120
Answer:4 (b) Order per year=4800/120=40 order
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