Best Bikes produces bicycles and buys brakes from a supplier in Japan. The brake

Question

Best Bikes produces bicycles and buys brakes from a supplier in Japan. The brake set for one bicycle costs $125, and it is $35 to process the order with the supplier. The company consistently sells 50 bicycles a week (for 52 weeks of the year) and holds an average of 1 week of brake sets in inventory to cover the constant lead time from Japan. The company uses a holding/carrying rate of 25%.

1. What is the average inventory carrying/holding cost for the brakes?

2. What is the EOQ for the brakes?

3. What is the ROP for the brakes?

4. What is the total annual inventory cost for the brakes?

Explanation / Answer

Given are following details :

Annual demand of brakes = D = 50 / week x 52 weeks = 2600

Order processing cost = Co = $35

Annual unit holding cost = Ch = 25% of $125 = $31.25

Economic Order Quantity ( EOQ )

= Square root ( 2 x Co x D / Ch )

= square root ( 2 x 35 x 2600 / 31.25 )

= 76.31 ( 76 rounded to nearest whole number)

AVERAGE ANNUAL INVENTORY COST = $31.25 PER UNIT

ECONOMIC ORDER QUANTITY = 76

Reorder point ( ROP ) for the brakes

= Average weekly demand x Lead time ( 1 week)

= 50 x 1

= 50

Total annual inventory carrying cost

= Annual unit holding cost x Average inventory

= Ch x EOQ/ 2

= 31.25 x 76/ 2

= $1187.50

REORDER POINT = 50

ANNUAL INVENTORY CARRYING COST = $1187.50

AVERAGE ANNUAL INVENTORY COST = $31.25 PER UNIT

ECONOMIC ORDER QUANTITY = 76

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