IOE 691 Fall Semester 2017 Final Exam Allied Chemical Baton Rouge Plant laborato

Question

IOE 691 Fall Semester 2017 Final Exam Allied Chemical Baton Rouge Plant laboratory (ACBR) purchases sample kits from B&A; Lab Supply. ACBR expects to use 40,000 sample kits next year. The cost to order and have the kits delivered is $800 per order. ACBR is currently ordering based on the EOQ model and the annual carrying cost is $1.90 per kit for the EQO ordered amount. However, it is expected that carrying costs will increase by 5% for each 10,000 kits above the current EOQ order size because of added storage and insurance costs. The supplier is offering the following discount pricing schedule. Determine the 1. recommended order size for the laboratory based on minimizing the total annual costs relative to inventory management. (25 Points Value). Quantity of Sample Kits Discount per kit (amount lab pays to the 1-9,999 10,000-19,999 20,000-29.999 30,000-39,999 40,000+ $3.40 S3.20 $3.00 $2.80 $2.60

Explanation / Answer

Annual demand, D = 40,000

Ordering cost, S = 800 per order

Carrying cost per unit, H = 1.9

EOQ = (2DS/H) = (2*40000*800/1.9) = 5804

For each discount slab, determine the total annual inventory related cost, comprising Ordering cost (OC), inventory Holding cost (HC), Purchase cost (PC)

Note that Inventory holding cost per unit (H) increases 5% for every 10,000 kits added to order quantity, starting with 20,000 kits, which is 14196 more than EOQ.

We see that the total annual inventory related cost is lowest for order size of 10,000 kits.

Therefore, recommended order size = 10,000 kits

Lot size Policy: EOQ 10,000 kits 20,000 kits 30,000 kits 40,000 kits D = 40,000 40,000 40,000 40,000 40,000 S = 800 800 800 800 800 H = 1.90 1.90 2.00 2.09 2.20 P = 3.40 3.20 3.00 2.80 2.60 Q = 5,804 10,000 20,000 30,000 40,000 OC =S*D/Q 5,514 3,200 1,600 1,067 800 HC =H*Q/2 5,514 9,500 19,950 31,421 43,990 PC =D*P 136,000 128,000 120,000 112,000 104,000 TC =OC+HC+PC 147,027 140,700 141,550 144,488 148,790

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