SHOW ALL STEPS, FORMULAS, AND EXPLANATIONS Given the following list of items: a.
ID: 340405 • Letter: S
Question
SHOW ALL STEPS, FORMULAS, AND EXPLANATIONS
Given the following list of items:
a. Classify the items as A, B, or C
b. Determine the economic order quantity for each item (round to the nearest whole unit)
Item
Estimated Annual Demand
Ordering Cost
Holding Cost (%)
Unit Price
H4-010
20,000
55
25
4.5
H5-201
60,200
65
25
6
P6-400
9,800
85
35
30.5
P6-401
14,500
55
35
14
P7-100
6,250
55
35
11
P9-103
7,500
55
45
24
TS-300
21,000
45
30
47
TS-400
45,000
45
30
42
TS-041
800
45
30
22
V1-001
33,100
30
40
6
Item
Estimated Annual Demand
Ordering Cost
Holding Cost (%)
Unit Price
H4-010
20,000
55
25
4.5
H5-201
60,200
65
25
6
P6-400
9,800
85
35
30.5
P6-401
14,500
55
35
14
P7-100
6,250
55
35
11
P9-103
7,500
55
45
24
TS-300
21,000
45
30
47
TS-400
45,000
45
30
42
TS-041
800
45
30
22
V1-001
33,100
30
40
6
Explanation / Answer
a) Item classification into A,B and C classes can be done based on the value that the items contribute to the overall value all the items.
Value of Item i = Estimated Annual Demand * Unit Price
Once the items are arranged in a descending order in terms of value, the items which are contributing to around 80% value are grouped under A class.
The items that are contributing to around 15 % (80-95 % cumulative) are grouped under B class.
The items that are contributing to around 5 %(95-100 % cumulative) are grouped under C class.
Economic Order Quantity (EOQ) = SQRT(2*D*S/H) where D = Annual Demand, S = Ordering Cost, H = Holding cost = % Holding cost * Unit Price.
Below is the calculation table with grouping based on the cumulative percentages, EOQ based on the formula -
Item
Estimated Annual Demand
Ordering Cost
Holding Cost (%)
Unit Price
Value of the product annual quantity
%Contribution
%Cumulative
Class
EOQ = SQRT(2*D*S/H)
TS-400
45,000
45
30
42
1890000
44.00
44.00
A
567
TS-300
21,000
45
30
47
987000
22.98
66.98
A
366
H5-201
60,200
65
25
6
361200
8.41
75.39
A
2284
P6-400
9,800
85
35
30.5
298900
6.96
82.35
A
395
P6-401
14,500
55
35
14
203000
4.73
87.08
B
571
V1-001
33,100
30
40
6
198600
4.62
91.70
B
910
P9-103
7,500
55
45
24
180000
4.19
95.89
B
276
H4-010
20,000
55
25
4.5
90000
2.10
97.99
C
1398
P7-100
6,250
55
35
11
68750
1.60
99.59
C
423
TS-041
800
45
30
22
17600
0.41
100.00
C
104
Sum
4295050
100.00
Item
Estimated Annual Demand
Ordering Cost
Holding Cost (%)
Unit Price
Value of the product annual quantity
%Contribution
%Cumulative
Class
EOQ = SQRT(2*D*S/H)
TS-400
45,000
45
30
42
1890000
44.00
44.00
A
567
TS-300
21,000
45
30
47
987000
22.98
66.98
A
366
H5-201
60,200
65
25
6
361200
8.41
75.39
A
2284
P6-400
9,800
85
35
30.5
298900
6.96
82.35
A
395
P6-401
14,500
55
35
14
203000
4.73
87.08
B
571
V1-001
33,100
30
40
6
198600
4.62
91.70
B
910
P9-103
7,500
55
45
24
180000
4.19
95.89
B
276
H4-010
20,000
55
25
4.5
90000
2.10
97.99
C
1398
P7-100
6,250
55
35
11
68750
1.60
99.59
C
423
TS-041
800
45
30
22
17600
0.41
100.00
C
104
Sum
4295050
100.00
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