6-5Paul Bunyan\'s Lumber Company periodically buys tenpenny size nails. The ppli
ID: 2586449 • Letter: 6
Question
6-5Paul Bunyan's Lumber Company periodically buys tenpenny size nails. The pplier will deliver any quantity of a particular order size for a charge of $I plus $.20 per pound. It costs the store $.15 per dollar value of inventory items stored for one year. A total of 600 pounds of tenpenny nails are sold each year. How many pounds of nails should be ordered, and how often should orders be placed to minimize total annual inventory cost? Suppose that Paul Bunyan's has patient customers who will backorder tenpenny nails when they are out of stock. The annual cost of each pound of nails short is $.01. (1) Determine the optimal order quantity. (2) How many nails will have been backordered when each new shipment arrives? (a) (b)Explanation / Answer
a. To minimize the total order quantity, Economic order quantity is used.
Econimic Order Quantity = SquareRoot of [(2 x Total quantity required x order cost) / carrying cost per annum]
Total Quantity required = 600 pounds
Order cost = $1.20 per pound.
Carrying Cost = $.15 per dollar value or (.15 / $1.20) = 0.125 per pound.
EOQ = Squareroot of [(2 x 600 x 1.2 ) / .125] = 107.33 pounds
107.33 pounds of Nails should be ordered to minimize the inventory cost.
Days in which order should be placed = 365 / Number of orders
Number of orders required = 600 / 107.33 = 5.59 orders
Days to next order = 365 / 5.59 = 65.29 days.
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