a. Weekly demand for an item over a 10-week period is shown below. The following
ID: 374430 • Letter: A
Question
a. Weekly demand for an item over a 10-week period is shown below. The following cost information is available for the material: storage cost = 3%, risk of obsolescence = 6%, cost of capital is 11%. The fixed ordering cost per order is $50 and the variable ordering cost per order is $85. The item costs $100. Assume 52 weeks in a year. Complete the tables below using
The EOQ model (3 pts)
The POQ model. (4 pts)
EOQ
Week
1
2
3
4
5
6
7
8
9
10
Demand
70
40
85
50
25
30
10
65
50
25
Planned Order Receipt
Available Balance
POQ
Week
1
2
3
4
5
6
7
8
9
10
Demand
70
40
85
50
25
30
10
65
50
25
Planned Order Receipt
Available Balance
b. Which technique produces the lower total inventory management cost. (holding and ordering) (3 pts)
Week
1
2
3
4
5
6
7
8
9
10
Demand
70
40
85
50
25
30
10
65
50
25
Planned Order Receipt
Available Balance
Explanation / Answer
Average weekly demand, D = (70+40+85+50+25+30+10+65+50+25)/10 = 45
Carrying cost rate = Storage cost + Obsolescnece cost + cost of capital = 3% + 6% + 11% = 20%
Carrying cost per unit per year, = item cost * carrying cost rate = 100*20% = 20
Carrying cost per unit per week, H = 20/52 = 0.38
Ordering cost, S = fixed ordering cost + variable ordering cost = 50+85 = 135
EOQ = (2*D*S/H) = (2*45*135/0.38) = 178
Review period = (Q/D) = 178/45 = 3.96
a) EOQ
Total inventory carrying cost = Sum of All Available Balance * Carrying cost per unit per week = 988*0.38 = 380
Total ordering cost = Number of orders * Total ordering cost per order = 3*135 = 405
Total cost = 380+405 = $ 785
POQ
In POQ, policy, review period is 4 weeks, so quantity equal to 4 weeksof demand is order at a time.
So order quantity in week 1 = 70+40+85+50 = 245
Order quantity in week 5 = 25+30+10+65 = 130
Order quantity in week 9 = 50+25 = 75
Total inventory carrying cost = Sum of All Available Balance * Carrying cost per unit per week = 630*0.38 = 242
Total ordering cost = Number of orders * Total ordering cost per order = 3*135 = 405
Total cost = 242+405 = $ 647
b) POQ technique produces the lower total inventory management cost
Week 1 2 3 4 5 6 7 8 9 10 Demand 70 40 85 50 25 30 10 65 50 25 Planned Order Receipt 178 178 178 Available Balance 108 68 161 111 86 56 46 159 109 84Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.