Problem 4 Dana sells unique serving pots shipped all the way from China. Five or

Question

Problem 4 Dana sells unique serving pots shipped all the way from China. Five orders are made yearly with a cost of350 OR. for all five orders. These pots can be shipped via two methods, which are by air and by sea. If air transportation is used, the order is delivered a week after the order placement, and if the products are shipped by sea they are delivered after a month. a. What is the total ordering cost, and the ordering cost per order. b. If the ordering quantity is 500 pot, what is the annual demand. c. When shall Dana place an order and what is the inventory level needed in each shipping alternative. d. If 10 pots are set as safety stock, how will ROP change? e. If average cost of goods sold is 550 OR. what is the inventory turnover.

Explanation / Answer

a) Total Ordering Cost=350 9given) Ordering Cost per order=350/5=70

b)annual demand=number of orders * order size=5*500=2500

c) Reorder point= daily demand*lead time

for Air Transportation=(2500/365)*7=48

for sea=(2500/365)*30=205.47=206

Since ordering cost for both the modes are same , air should be used.

d) safety stock will get added to ROP calculated earlier

for air=48+10=58

for sea=206+10=216

e) Inventory Turnover=Cost of good sold/avg inventory

=(2500*550)/(500/2)=5500

ordering qty was given 500

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