Hello, Please show all work. Thank you in advance. You are reviewing the invento
ID: 325405 • Letter: H
Question
Hello, Please show all work. Thank you in advance.You are reviewing the inventory ordering decision associated with the purchase of wide screen plasma televisions for a nationally known retail chain. The supplier's production capacity is 2,000 sets per quarter. Your annual demand (sales) of these television sets is 2,000 sets per year. Both the supplier and your company operate 260 days per year. The cost of ordering these TV sets is $300 and the cost of holding is $16 per unit per year. Your company has traditionally ordered 500 of these television sets every 3 months Would you recommend changing the current production lot size? Why or why What lot size would you change it to? (15 points) b. How much could by saved anualy by switching to your recomimended lot size? (o points) L. Using your recommended economic order quantity, what would be the maximum level of inventory? (Spoints)
Explanation / Answer
Annual demand, D = 2000 sets
Ordering cost, S = $ 300
Holding cost, H = $ 16
a) Economic order quantity for the buyer company = SQRT(2DS/H) = SQRT(2*2000*300/16) = 274 sets
Therefore, the current lot size is not optimal, So, I would change the lot size to 274 sets per order
b) Annual Inventory Cost of current policy (Q=500) = ordering cost + holding cost = (D/Q)*S+(Q/2)*H = (2000/500)*300+(500/2)*16 = $ 5200
Annual Inventory Cost of EOQ policy (Q=274) = ordering cost + holding cost = (D/Q)*S+(Q/2)*H = (2000/274)*300+(274/2)*16 = $ 4382
Annual cost savings = 5200 - 4382 = $ 818
c) Maximum inventory level at buyer company = Q = 274
Demand rate, d = 500 per quarter
Production rate p = 2000 per quarter
Maximum Inventory level at supplier company = Q*(1-d/p) = 274*(1-500/2000) = 206
This inventory cost analysis is done for the buyer company, as asked in the question.
Analysis for the supplier company will be different, as EPQ model is applicable for supplier.
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