C Optimal ordering policy; The simple BOM procedure does not consider the econom
ID: 331964 • Letter: C
Question
C Optimal ordering policy; The simple BOM procedure does not consider the economic perspectives of the operation. In reality, placing an order costs money and manpower. On the other hand, holding the inventory also incurs warehouse/carrying cost. How would you give an economic plan for BOM for the company such that the total cost of ordering and carrying is minimized? Assume any reasonable data you need. CASE STUDY REPORT: You may use any kind of figure or picture or table to explain the case better. You may consult any materials or report for better understanding of the problem.Explanation / Answer
Economic order quantity (EOQ) is the order quantity of inventory that minimizes the total cost of inventory ie. carring cst and ordering cost
Example
Seema Ltd. is in business of selling calculators. Its cost per order is $350 and its carrying cost unit is $8 per unit per annum. The company has a demand for 15000 units per year.
EOQ = SQRT(2 × 15000 × 350/8) = 1,145 units
Annual demand is 15000 units so the company will place 13 orders (=15000/1145). Total ordering cost is hence $4500($350 *13).
Average inventory is 572.5 ((0+1145)/2) therefore total carrying costs of $4580 (i.e. 572.5 × $8).
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