(50 points) EOQ and Power-of-Two reorder intervals: Best Buy sells two models of
ID: 457371 • Letter: #
Question
(50 points) EOQ and Power-of-Two reorder intervals: Best Buy sells two models of a product, the Litepro (L) and the Heavypro (H). Annual demand for the two products is Dl = 12,000 and Dh = 1,200. Assume that each model costs Best Buy $500 (this equal-cost value is not realistic, but it is a simplification). A fixed transportation cost of $4,000 is incurred each time any order is delivered. For each model ordered and delivered on the same truck, an additional fixed cost of $1,000 is incurred for receiving and storage. (If only one product is ordered the corresponding total fixed order cost is $4,000+1,000 = $5,000 per order. If both products are ordered concurrently than the total fixed order cost is $4,000 +1,000+1,000 = $6,000 per order and one product effectively has a reduced fixed order cost of $1,000/order while the other product incurs the full fixed cost of $5,000/order.) Best Buy incurs a holding cost of 20 percent. Best Buy operates for 350 working days per year.
a. (14 points) Independent Case: Evaluate the lot sizes that the Best Buy manager should use if lots for each product are ordered and delivered independently. Calculate the annual relevant cost of this policy.
b. (19 points) Power-of-two Joint Ordering: Evaluate the lot sizes that the Best Buy manager should use if lots for each product are ordered in a manner so that reorder intervals, measured in days, are Powers-of-Two, e.g, 1,2,4,8,16....,days. (You may start with the EOQ values from part a above and use the Power-of-Two rounding method discussed in class/ Factory Physics text.) Calculate the annual releavant cost of such a policy.
c. (17 points) Completely Joint Case: Evaluate the lot sizes that the Best Buy manager should use if lots for each product are ordered and delivered concurrently. Also calculate the annual relevant cost of such a policy. [Note: In this case, both models are included each time an order is placed. Hint: It may be easier to address this lot sizing problem using the reorder interval notion.]
Explanation / Answer
a) Annual relevant of product Litepro = 109,545
Annual relevant of product Heavypro = 34,641.
Total Annual Revlevant Cost = 144186
b) Total Annual Relevant cost = 142405
(c) Total relevant cost = 126000
Litepro Heavypro Annual Demand = D 12000 1200 Working days per year 350 350 Daily Demand µD 34.3 3.4 Unit Cost/Price (P) 500 500 Ordering Cost (O) 5000 5000 Annual Holding Rate (CR) 20% 20% Annual Holding Cost (H) =P*CR 100 100 Lot Size / Optimal Order Qty (Q) 1095 346 EOQ =(2*D*O/H) Number of Orders per year (N) 11.0 3.5 Order Interval (days) 32.0 101.0 Annual Ordering Cost (AOC) = O*N 54,772 17,321 Annual Holding Cost (AHC) = Q/2*H 54,772 17,321 Total Annual Relevant Cost of Inventor = AOC + AHC 109,545 34,641Related Questions
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