Q3] You are lucky enough to be the owner of IMSE Toaster, a new establishment in
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Question
Q3] You are lucky enough to be the owner of IMSE Toaster, a new establishment in Aggieville. As such you sell 300 toasters every month (or 75 a week). You buy the toasters in quantities of 500 calculated using EOQ (!) (hence it is your Q*). Your holding cost consist of 36% per year, and each toaster costs you $40.
What is the setup cost used in finding the EOQ order size?
Now, you received an offer from another supplier giving you 10% price discount you buy the toasters in quantity of 1500 or more. Should you accept this offer
Sticking to your solution in part (a), your supplier's lead time is 8 weeks. What should be your reorder point (R) if you follow Continuous Review Policy? (If you need you can assume 48 weeks in a year).
Q4] Happy Al tries to run an optimal lot sizing on his Planned Order Release vector. The orders vector is: r = (52, 36, 27, 60)
You are not sure about the exact ordering or holding cost, but you know that the ratio of ordering to holding cost is 50:1 (You can assume if you want that the holding is $ per part per period)
Find the optimal ordering vector with regard to the lot size.
Happy Al remembers now that his capacity is limited to 55 units every period. Does it change your solution? If so can you suggest a feasible solution?
Happy Al gets a special offer to double his capacity for a price of $ 150, Should he upgrade his capacity?
Explanation / Answer
To be calculated:
Setup cost or Ordering cost in finding the EOQ order size
Given Information:
1) Demand = 300 toasters per month or 75 toasters per week
Total work weeks in a year = 48
Therefore, Annual Demand = 75 x 48 = 3600 toasters
2) Economic order quantity (EOQ) or Q* = 500 toasters
3) Cost of each toaster = $40
4) Holding cost per year = 36%
Therefore, holding cost per unit per year = 36% of $40 = 14.4 = $14
Solution:
(Part A)
EOQ or Q* is calculated as:
Q* = 2 x annual demand x cost per order / holding cost per unit per year
500 = 2 x 3600 x cost per order / 14
Therefore, cost per order = {(500)^2 x 14} / 2 x 3600
Cost per order or Setup cost = 486.11 = $487
Now, Annual ordering cost = {Fixed cost per order x Annual Demand} / Order Quantity
= {487 x 3600} / 500 = 3506
Annual ordering cost = $3506
(Part B)
New offer
10% price discount
New cost of each toaster = $36
New EOQ or Q* = 1500
New Holding cost per unit per year = 36% of $36 = 12.96 = $13
Cost per order can be calculated as:
Q* = 2 x annual demand x cost per order / holding cost per unit per year
1500 = 2 x 3600 x cost per order / 13
Cost per order = {(1500)^2 x 13} / 2 x 3600
Cost per order or Setup cost = $4062
Therefore, although the new supplier is offering 10% discount on each toaster, but because of new order quantity which is getting increased to 1500 toasters from current 500 toasters, the cost per order or setup cost will increase to $4062 from current $487 per order. Hence, we should not accept the offer from the new supplier.
(Part C)
Lead time (M) = 8 weeks = 56 days
Demand per week = 75 toasters
Demand per day (D) = 10.71 = 11 toasters
Reorder point can be calculated as:
R = (D x M) where, R = Reorder point, D = Demand per day, M = Lead time for new order in days
R = 11 x 56
R = 616 toasters
Therefore, reorder point when following continuous review policy should be 616 toasters
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