Any help on this would be helpful! Q2 Inventory Problems Q2 A.) (5 pts) What are

Question

Any help on this would be helpful!

Q2 Inventory Problems Q2 A.) (5 pts) What are the assumptions of the basic EOQ model, and to what extent do they limit the usefulness of the model? Q2 B.) (10 pts) A computer products store stocks color graphics monitors, and the daily demand is normally distributed with a mean of 1.8 monitors and a standard deviation of 0.6 monitor. The lead time to receive an order from the manufacturer is 20 days. Determine the reorder point that will achieve 98% service level (z = 2.05).

Explanation / Answer

2A 1. EOQ assumes constact and predictable material usage which is not the case always 2. EOQ states to buy quantity in fixed quantum, however when special order or bulk order comes, it is not possible to buy in EOQ 3. At times, cost of implementing EOQ may out do possible benefits out of it. 2B Mean Demand 1.8 Standard Deviation of Weekly Demand (SDd) 0.6 Lead Time (days) 20 Standard Deviation of Lead Time (SDl) = SDd * Lead Time = 0.6 * 20 = 2.68 2.68 Service Level Desired 98% Z Value at 98% 2.05 Safety Stock for 98% service level Z value * Standard Deviation (Demand Lead Time) (2.05 * 2.68) 6 Lead Time Demand ( Lead Time * Avg Demand) 36 Reorder Point = Lead Time Demand + Safety Stock 42 Annual Demand 855 Ordering Cost $    350.00 Carrying Cost - 15% of price i.e. 15% * $69 $       10.35 a. EOQ = 2AO / C where A = Annual Demand O = Ordering Cost per order C = Carrying Cost per unit per annum Initial EOQ at base price EOQ = 2AO / C = (2 * 855 * 350) / 10.35 = 240.4706 units or, 240 units This is not feasible solution as qty ordered has to be within 199 units Since supplier gives discount when qty ordered is more than 199, hence EOQ needs to be calculated at each price range Supplier gives disount offer if qty purchased is between 200-249 units When Price is $ 65, Carrying cost = $ 9.75 EOQ = 2AO / C = (2 * 855 * 350) / 9.75 = 247.7592 units or 248 units Supplier gives disount offer if qty purchased is 250 - 299 When Price is $59, Carrying cost = $ 8.85 EOQ = 2AO / C = (2 * 855 * 350) / 8.85 = 260.0521 units or 260 units Supplier gives disount offer if qty purchased is 300 or more When Price is $56, Carrying cost = $ 8.40 EOQ = 2AO / C = (2 * 855 * 350) / 8.40 = 266.927 or 267 units This is not feasible solution as qty ordered has to be 300 or more. Hence optimal order qty will occur at lowest of range that is 300 units and for 0-100 units at higher end of range, i.e 100 units Optimal Order Quanity 1 - 199: 199 200 - 249: 248 250 - 299: 260 300 or more: 300 Inventory Order Size (A) 199 248 260 300.00 Price (B) 69.00 65.00 59.00 56.00 Direct Cost (Price * Annual Demand = B* 855) (C) $58,995.00 $55,575.00 $50,445.00 $47,880.00 No of orders (Annual Demand/Order Quantity per order = 855 / A) (D) 4 3 3 3 Ordering Cost (No orders * $350 = D *$350) ( E) $1,503.77 $1,206.65 $1,150.96 $997.50 Carrying Cost per unit (15% * B) (F) 10.35 9.75 8.85 8.40 Carrying Cost (Order Size / 2 * Carrying Cost per unit per annum = A/2 * F) (G) $1,029.83 $1,209.00 $1,150.50 $1,260.00 Total Cost (B+E+G) $61,528.59 $57,990.65 $52,746.46 $50,137.50 Since the total cost is lowest at 300 units, this is the optimal order quantity. Total Cost of Ordering Optimal Order quanity = $ 50,137.50

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