For Problem 4 mentioned below, we determined that the EOQ was equal to 1095.45 u

Question

For Problem 4 mentioned below, we determined that the EOQ was equal to 1095.45 units. Management at that firm thinks the number itself might be difficult to operationalize. They are considering using an order quantity of Q=1100 or 1000. Evaluate each of these two options in terms of the effect on the holding, ordering, and total costs. Then provide management with related advice. Should they opt against the EOQ? Why or why not?

Westside Auto purchases a component used in the manufacture of automobile generators directly from the supplier. Westside's generator production operation, which is operated at a constant rate, will require 1000 components per month throughout the year (12,000 units annually). Assume that the ordering costs are $25 per order, the unit cost is $2.50 per component, and annual holding costs are 20% of the value of the inventory. Westside has 250 working days per year and a lead time of 5 days. Answer the following inventory policy questions: a. What is the EOQ for this component? What is the reorder point? What is the cycle time? C. d. What are the total annual holding and ordering costs associated with your recom mended EOQ?

Explanation / Answer

With Q = 1100;

For order = 1000

So we get the summary:

The best option is to stick to EOQ as the cost is minimum then.

Of the two available options 1100 is better as it has total cost on the lower side.

And it is possible to reduce the Purchase cost if the order size is bigger as the manufacturer side costs are minimal if the order sizes are bigger.

D Demand Total 12000 units per annual p Purchase cost 2.5 R per unit K Ordering cost 25 R per order h Holding cost at 20% 0.5 R per unit per year EOQ (Sqrt(2*k*D/h) 1095.45 1095 units AI Average inventory 548 units EOQ/2 (AI*h) Holding cost 273.86 $ (p*AI) Purchasing cost 1369.31 $ N=D/EOQ No of orders 10.95 times Total orders/EOQ Toc Total ordering cost annualy 273.86 $ Thc Annual Holding cost 273.86 $ THOC 547.72 (Toc+Thc) Tpc Purchasing cost annual 30000.00 $ TC Total cost 30547.72 $ (Toc+Thc+Tpc)

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