Danny Steel Inc. fabricates various products from two basic inputs, bar stock an
ID: 390594 • Letter: D
Question
Danny Steel Inc. fabricates various products from two basic inputs, bar stock and sheet stock. Bar stock is used at a steady rate of 1,000 units per year and costs $200 per bar. Sheet stock is used at a rate of 400 units per year and cost $160 per sheet. The company uses a 25 percent annual holding cost rate, and the fixed cost to place an order is $50, of which $10 is the cost of placing the purchase order and $40 is the fixed cost of a truck delivery. The variable (Le. per unit charge) trucking cost is included in the unit price. The plant runs 365 days per year a) Compute the optimal order quantities for bar stock and sheet stock b) Compute the annual cost (holding plus order) for bar stock and sheet stock in two different situations: L.No chance to share trucks; I1. Sheet stock orders always overlap with bar stock orders and there is no trucking cost for sheet stock (Note: do not consider the unit cost in your calculations). c) Suppose it is possible to share trucks for bar stock and sheet stock. The manager changed the order interval for bar stock and sheet stock to 15 days and 30 days respectively, Compute the annual cost (holding plus order) based on the new order intervalsExplanation / Answer
(a) EOQ = [ 2xdemand per annum xordering cost / anuual cost of holding one unit]1/2
EOQ for bar = [ 2x 1000x50 / 200x0.25]1/2 = 44.72 =45
EOQ for sheet = [ 2x 400 x50 /40]1/2 = 31.62 =32
(b) Case I - Holding cost of bar = 45/2 x 50 =1125
Ordering cost of bar = No. of orders x50 = 1000/45 x50 = 23x50 = 1150
Holding cost of sheet = 32/2 x40 =640
Ordering cost of sheet = 400/32 x 50 = 13x50 = 650
Total cost = 1125+1150+640+650 = 3565
Case II - When orders can be clubbed
Holding cost will remain the same
Orders = 13 orders clubbed + 10 orders of bar only
Ordering cost = 13x(50+10) + 10x50 = 1280
Total cost = 1765+1280 = 3045
(c) No of ordes for bars = 365 /15 = 25
No of orders for sheets = 365 /30 = 13
Quantity for bars per order = 1000/25 =40
Quantity for sheets per order = 400/13 = 31
Common orders = 13
separate orders = 12
Ordering cost = 13x60+12x50 = 1380
Holding cost = 40/2 x50+31/2x40 = 1620
Total cost = 3000
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