Problem B: Again you are the new Inventory Manager at Konrad’s Kuckoo’s. Your bo

Question

Problem B:

Again you are the new Inventory Manager at Konrad’s Kuckoo’s. Your boss is pleased with your work with the supply situation in Problem A and would now like you to look at a similar problem when ordering from another clock supplier.

This time the supplier is in Switzerland. Because these clocks are much more expensive they do not sell as quickly at the clocks from Germany. Here is the data for the Swiss clocks:

Demand period is 360 days

Demand during the period: 2700 units

Ordering and Transportation costs per order: $4500

Carrying cost per unit per month (30 days): $8.00

Order lead Time from Switzerland: 20 days

What is the

Economic Order Quantity (EOQ)

Average Cycle Stock

The annual Holding (Carrying Cost) and Ordering Costs

The suggested Reorder Point for this item?

Explanation / Answer

Demand period is 360 days

D Demand during the period: 2700 units

S Ordering and Transportation costs per order: $4500

H Carrying cost per unit per month (30 days): $8.00 = 8*360/30 = 96 per year

L Order lead Time from Switzerland: 20 days

1) Economic Order Quantity = SQRT(2DS/H) = SQRT(2*2700*4500/96) = 503

2) Average cycle stock = Q/2 = 503/2 = 252

3) Annual holding and ordering cost = (Q/2)*H+(D/Q)*S = (503/2)*96+(2700/503)*4500 = $ 48,299

4) Suggested reorder point = Demand per day * Lead time in days = (D/360)*L = (2700/360)*20 = 150

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