Ergonomics Inc. sells ergonomically designed office chairs. The company has the
ID: 449787 • Letter: E
Question
Ergonomics Inc. sells ergonomically designed office chairs. The company has the following information:
Average demand = 25 units per day
Average lead time = 41 days
Item unit cost = $61 for orders of less than 310 units
Item unit cost = $59 for orders of 310 units or more
Ordering cost = $36
Inventory carrying cost = 20%
The business year is 250 days
Assume there is no uncertainty at all about the demand or the lead time.
a. Calculate EOQ if unit cost is $61 and $59. (Note: These EOQs do not need to be feasible in their price range.) (Round up your answers to the next whole number.)
EOQ
Unit cost at $61 _______ units
Unit cost at $59 _______ units
b. Calculate annual ordering costs for each alternative? (Round your answers to 2 decimal places.)
Annual Ordering Cost
Unit cost at $61 $ __________
Unit cost at $59 $ __________
c. Calculate annual inventory carrying costs for each alternative? (Round your answers to 2 decimal places.)
Annual Inventory
Carrying Cost
Unit cost at $61 $ _________
Unit cost at $59 $ _________
d. Calculate annual product costs for each alternative?
Annual Product Cost
Unit cost at $61 $ _________
Unit cost at $59 $ _________
e. What will be the total costs for each alternative? (Round your answers to 2 decimal places.)
Total Cost
Unit cost at $61 $ ________
Unit cost at $59 $ ________
f. How many chairs should the firm order each time?
Order quantity ________ chairs
g. How much the firm can save annually by using the order quantity in Part f. instead of the first EOQ shown in Part a? (Round your answer to 2 decimal places.)
Amount saved $ ___________
Explanation / Answer
D = 25 * 250 = 6250
Co = $36
H = 20% = 0.2
A)
When C = $61
EOQ = Sqrt((2 * D * Co)/(H*C)) = Sqrt((2 * 6250 * 36)/(0.2*61)) = 192.055 = 192
When C = $59
EOQ = Sqrt((2 * D * Co)/(H*C)) = Sqrt((2 * 6200 * 36)/(0.2*59)) = 195.28 = 195
b)
When C = $61
Annual Ordering Cost = ((D/Q)*Co) = ((6250/192)*36) = 1171.875
When C = $59
Annual Ordering Cost = ((D/Q)*Co) = ((6250/195)*36) = 1153.846
c)
When C = $61
Annual Holding Cost = ((Q/2)*C*H) = ((192/2)*61*0.2) = 1171.2
When C = $59
Annual Holding Cost = ((Q/2)*C*H) = ((195/2)*0.2*59) = 1150.5
d)
Annual product Cost = (61 * 6250) = 381250
Annual product Cost = (59 * 6250) = 368750
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