The materials manager for a billiard ball maker must periodically place orders f
ID: 388600 • Letter: T
Question
The materials manager for a billiard ball maker must periodically place orders for resin, one of the raw materials used in producing billiard balls. She knows that manufacturing uses resin at a rate of 50 kilograms each day, and that it costs $.04 per day to carry a kilogram of resin in inventory. She also knows that the order costs for resin are $100 per order, and that the lead time for delivery is four (4) days. Assume cost per unit (c) is $365 per kg. Assume 365 days in a year.
What is the Total Cost (TC) at the EOQ?
Explanation / Answer
We have following information
Daily demand = 50 kilogram
Number of days in a year = 365 days
Therefore Annual demand D = 365 * 50 kilogram = 18,250 kilogram per year
Ordering cost S = $ 100 per order
Holding or carrying cost h = $0.04 per kilogram per day
Therefore annual Holding or carrying cost H = 365 *$0.04 per kilogram per day = $14.60 per kilogram per year
Cost per unit (c) = $365 per kg
First we have to calculate Optimum Order quantity per order which is EOQ
EOQ = Q = sqrt (2* D*S/H) = sqrt (2*18,250*$100/$14.60) = 500 kilogram
Let’s calculate total cost at this optimum order quantity
Total Annual cost (TC) = total ordering cost + total carrying cost + purchase cost
= (D/Q)* S + (H*Q)/2 + Unit cost * D
= (18,250/500)*$100 + ($14.60*500)/2 + $365 * 18,250
= $3,650 + $3,650 + $6,661,250
= $6,668,550
Total cost at EOQ is $6,668,550.
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