The demand for a particular part called SKU 005 is 1,500 units a year. The cost
ID: 383791 • Letter: T
Question
The demand for a particular part called SKU 005 is 1,500 units a year. The cost of one SKU 005
is $64.00. It costs $60.00 to place an order SKU 005, and the user of SKU 005 has a per year inventory carrying cost of 25% of unit cost. Assume that there are 250 working days in the year where SKU 005 is used. Please answer the following three questions, based on this information.
question 1) How many of SKU 005 should be ordered, to minimize combined ordering and holding cost? I know the answer is 106 I need to know how to break this question down to get the answer. how do you get 106 for the answer.
question 2) Once the purchasing manager for SKU 005 places an order, it always takes the vendor 5 working days to deliver that order. What should the purchasing manager’s reorder point be? I know the answer is 30 but how do you get that answer?
Explanation / Answer
Annual demand (D) = 1500 units
Number of days in a year = 250
Average daily demand (d) = D/number of days in a year = 1500/250 = 6 units
Ordering cost (S) = $60
Cost per unit = $64
Carrying cost (H) = 25% of unit cost = 25% of $64 = $16
Lead time (L) = 5 days
1) In order to minimize the combined Ordering and Holding cost the economic order quantity should be ordered.
Economic order quantity = sqrt of (2DS / H)
= sqrt of [(2x 1500 x 60)/16]
= sqrt of 11250
= 106. 07 or rounded to 106 units
So the answer is 106.
2) Reorder point = d x L = 6 x 5 = 30 units
So the answer is 30.
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