A product used in a laboratory of the hospital costs $60 to order, and its carry
ID: 448301 • Letter: A
Question
A product used in a laboratory of the hospital costs $60 to order, and its carrying cost per time per week is one cent. Demand for the item is six hundred units weekly. The lead time is three weeks and the purchase price is $0.60.
a) What is the economic order quantity for this item?
b) What is the length of an order cycle?
c) Calaulate the total weekly cost.
d) What is the investment cost for this item?
e) If ordering costs increase by 50 percent, how would that affect EOQ?
f) What would be the reorder point for this item if no safety stocks were kept?
g) What would be the reorder point if one thousand units were kept as safety stock?
Explanation / Answer
Annual Demand (600 units/week * 52 weeks) 31200 Ordering Cost $ 60.00 Holding Cost ($0.01/week * 52 weeks) $ 0.52 EOQ = 2AO / H where A = Annual Demand O = Ordering Cost per order H = Holding Cost per unit per annum a EOQ = 2AO / H = (2 * 31200 * 60) / 0.52 = 2683.282 units or, 2683 units b # Orders = Annual Demand / EOQ = 31200 / 2683 = 11.63 or 12 orders Order Cycle Length = 52 weeks/ # Orders = 52 weeks / 12 orders = 4.33 weeks/per order If # orders are not rounded off Order Cycle Length = 52 weeks/ # Orders = 52 weeks / 11.63 orders = 4.47 weeks/per order c Total Weekly Cost Calculation Product Cost (600 units * $0.60 per unit) (A) $360.00 Average Inventory ( EOQ/2) (B) 1341.5 Holding Cost (C = B * $0.01) $13.42 Ordering Cost (D = Ordering Cost/ Order Cycle Length) $13.42 Weekly Cost (A+C+D) $386.84 d Investment Cost Total Holding Cost (1341.5 units * $0.01 * 52) $698 Total Ordering Cost (11.63 orders * $60) $698 $1,396 e - Reorder Point with no safety stock Reorder Point = Average Demand During Lead Time = Average Demand * Lead Time = 600 units/ week * 3 weeks = 1800 units f. Reorder Point with Safety stock Reorder Point = Average Demand During Lead Time + Safety Stock = 600 * 3 + 1000 = 2800 units
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