Sock company sells almost exaclt 200 units of a product per month on a continuou
ID: 2753091 • Letter: S
Question
Sock company sells almost exaclt 200 units of a product per month on a continuous basis. The product carrying costs are 60 dollars per year and ordering costs are 250 dollars per order. It takes 20 days to receive a shipment after an order is placed and the firm requires a safety stock of 8 days of usage in inventory. Calculate the economic order quantity. Calculate the total cost per year to to order and carry this item. Its supplier has notified john that is John increases its order quantity to 200 they will give it a discount. Calculate the dollar discount that the suppliers will have to give to John to result in a net benefit to the company. Describe a way a firm might lower its inventoy on a continuos basis.
Explanation / Answer
Answer: Calculation of the economic order quantity:
EOQ=Square root of (2AO/C)
A=Annual Demand
O=ordering cost
C=carrying cost
EOQ=Square root of (2*200 units*12 months*$250/$60)
=square root of (20000)
=142units
Calculation of the total cost per year to to order and carry this item:
Total cost = (2,400/142)($250) + (142/2)($60) = $8,485
Calculation of the dollar discount that the suppliers will have to give to John to result in a net benefit to the company.
Total cost at new level = (2,400/200)($250) + (200/2)($60) = $9,000
The yearly discount will have to be at least $515 ($9,000–$8,485) to make the decision neutral; over $515 to result in a net benefit to the company.
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