Chris Froome is a purchasing agent for a firm that sell components for high perf
ID: 450060 • Letter: C
Question
Chris Froome is a purchasing agent for a firm that sell components for high performance bicycles. One of the most popular components is the TDF bicycle frame which has an annual demand of 2,800 units. The cost of each frame is $570 and the inventory carrying cost is estimated to be 17% of the cost of each frame. Chris has made a study of the costs involved in placing an order for any of the frames the firm stocks, and he has concluded that the average ordering cost of $81.50 per order. Furthermore, it takes about one week for an order to arrive from the supplier, and the TDF operates 50 weeks per year.
a)What is the annual ordering cost?
b)What is the annual holding cost?
c)How many orders (on average) would be placed per year?
d)What is the average inventory?
e)What is the reorder point?
f)What is the EOQ?
Explanation / Answer
f)
EOQ = Sqrt( 2 x A x O / C)
= Sqrt( 2 x 2,800 x 81.50 / 570 x 17%)
= 68.63 or 69 units.
a)
Number of orders per year = A / EOQ = 2,800 / 69 = 40.58 or 41 orders.
Ordering cost per annum = Number of orders x Ordering cost per order = 41 x $81.50 = $3,341.50
b)
Annual holding cost = Average inventory x Holding cost per unit per annum
=( EOQ / 2 ) x $570 x 17%
= ( 69 / 2 ) x $96.90
= $3.343.00
c)
Number of orders per year = A / EOQ = 2,800 / 69 = 40.58 or 41 orders.
d)
Average inventory = EOQ / 2 = 69 / 2 = 34.50 Units.
e)
Consumption per week = A / Number of weeks per year = 2,800 / 50 = 56 units.
Since the lead time is 1 week (time taken by suppliar to deliver), so, reorder point is 1 week consumption, that is 56 units.
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