Last Name: First Class : , An oil company cost $70 each, and the annual holding
ID: 357717 • Letter: L
Question
Last Name: First Class : , An oil company cost $70 each, and the annual holding costs is 18 p bits ling company, AccuDrill, wear out drill bits at a rate of 4 per day. The drll is operated S days a week 50 weeks a year. Tbe bit ercent of purchase price. Ordering cost is $10 for each order. Assume the usage rate of dril is constant. Determine the following: show detail of your work Show Detail of your calculation: 30 points a. Annual demand for drill bits. b. The economic order quantity (EOo). c. Maximum inventory of bits, assume no safety stock d. The frequency with which drills are reordered e. Suppose a review of this process indicate that holding costs have increase to 25 percent due to increased opportunity costs, and that order S12, what EOQ would now be appropriate? What cost penalty would company incur by staying with former BOQ?Explanation / Answer
Data as follows :
Daily demand of drill = 4 / day
Therefore ,annual demand of drill = 4 / day x 250 days = 1000
ANNUAL DEMAND = 1000 DRILL BITS
= Square root ( 2 x Ordering cost x Annual demand/ Annual unit holding cost )
Given are :
Ordering cost = $10
Annual unit inventory cost = 18% of $70 =$12.6
Therefore , EOQ = square root ( 2 x 10 x 1000/12.6)= 39.84 ( 40 rounded to nearest whole number )
ECONOMIC ORDER QUNTITY = 40 DRILL BITS
DRILL BITS ARE REORDERED EVERY 10 DAYS
Revised ordering cost =$12
Annual unit inventory holding cost = 25% of470 = $17.5
Therefore ,REVISED EOQ = square root ( 2 x 12 x 1000/17.5)= 37.03 ( 37 ROUNDED TO NEAREST WHOLE NUMBER )
APPROPRIATE EOQ = 37 DRILL BITS
Calculation under former EOQ :
Annual ordering cost = Ordering cost x Number of orders = $10 x Annual demand/ EOQ = $10 x 1000/40 = $250
Annul inventory holding cost = Annual unit holding cost x average inventory = Annual unit holding cost x EOQ/2 =$12.6 X 40/2 = $252
Total annual inventory cost = Annual ordering cost + Annual inventory holding cost = $250 + $252 = $502
Calculation under present EOQ :
Annual ordering cost = $12 x 1000 / 37 =$324.32
Annual inventory holding cost = $17.5 x 37/2 = $323.75
Total annual inventory cost = $324.32 + $323.75 =$648.07
Therefore, cost penalty = $648.07 - $502 =$146.07
ANNUAL DEMAND = 1000 DRILL BITS
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