Best Bikes produces bicycles and buys brakes from a supplier in Japan. The brake

Question

Best Bikes produces bicycles and buys brakes from a supplier in Japan. The brake set for one bicycle costs $125, and it is $35 to process the order with the supplier. The company consistently sells 50 bicycles a week (for 52 weeks of the year) and holds an average of 1 week of brake sets in inventory to cover the constant lead time from Japan. The company uses a holding/carrying rate of 20%.

a) What is the average inventory carrying/holding cost for the brakes?

b) What is the EOQ for the brakes?

c) What is the ROP for the brakes?

d) What is the total annual inventory cost for the brakes?

e)What buying/purchasing strategy would be most appropriate for the brakes and why?

Explanation / Answer

Annual Demand of Brakes (50 * 52 weeks) 2600 Ordering Cost $35 Holding Cost - 20% of Price = $125 * 20% $25 EOQ = 2AO / H where A = Annual Demand O = Ordering Cost per order H = Holding Cost per unit per annum EOQ = 2AO / H = (2 * 2600 * 35) / 25 = 85.32 or, 85 units Reorder Point = Lead Time * Demand During Lead Time = 50 * 1 = 50 brakes Total Holding Cost (Average Inventory * Holding Cost per unit) $1,063 Total Ordering Cost (No of orders * Ordering Cost) $1,071 Total Cost $2,133 No of orders = Annual Demand/EOQ = 2600/ 85 = 30.58 Ordering Cost per order = $35 Average Inventory = EOQ / 2 = 85 / 2 = 42.5 units Holding Cost - 20% of Price = $125 * 20% = $25

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