8. Value Electronics has a yearly demand of 100,000 units for their tablet. The

Question

8.

Value Electronics has a yearly demand of 100,000 units for their tablet. The order processing cost per order is $2,000, and inventory holding cost is $100/item/year. They have opted for the reorder point system, and it has two options for transportation: by truck and by rail. Truck transportation takes 1 week, while rail transportation takes 2 weeks of lead time. Truck transportation costs $2 per tablet, while by rail the transportation cost is $1 per tablet. It is the policy of Value Electronics to hold enough inventories to cover demand for twice the lead time.

Calculate the annual cost of holding inventory for the rail scenario.

Explanation / Answer

Annual Demand, D = 100000

Order processing cost, S = 2000

Inventory Holding cost, H = 100

Economic Order Quantity, Q = (SD/H) = (2*2000*100000/100) = 2000

Cycle Stock = Q/2 = 1000 units

As given in the question, ROP = Lead time Demand + Safety Stock = 2*Lead time Demand. Therefore, Safety stock = Lead time Demand.

Assuming, there are 50 working weeks per year. Lead time demand = 2 weeks demand = 100000/50*2 = 4000 units

Assuming there are 50 working weeks in a year, Weekly demand = 100000/50 = 2000 units.

Safety stock = 2*2000 = 4000 units

Total Inventory holding cost = holding cost of ( cycle stock + safety stock ) = 100*(1000+4000) = $500,000

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.