11. Value Electronics has a yearly demand of 100,000 units for their tablet. The
ID: 467848 • Letter: 1
Question
11.
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 total annual cost for the rail scenario. Hint: the total annual cost contains 3 components.
Explanation / Answer
We need to calculate the total annual cost for the rail scenario, where we have
Yearly demand of 100,000 units, and rail transportation lead time of 2 weeks
Since Value Electronics has a policy to carry inventories (which is nothing but safety stock in this case) to cover demand for twice the lead time, we need to calculate safety stock covering demand for 4 weeks (twice of rail transportation lead time).
Assuming 52 weeks in a year, Weekly demand for tablets would be,
100,000/ 52 = 1923.07
Hence, safety stock would be,
1923.07 x 4 = 7692 (rounding off)
Order processing cost is $ 2000 per order
Assuming, safety stock level as the re-order point, no. of orders to be processed during a year would be,
100,000/ 7692 = 13 (rounding off)
Hence, annual ordering cost would be,
$ 2000 x 13 = $ 26000 (A)
Rail transportation cost is $ 1 per tablet
Hence, annual transportation cost would be transportation cost for 100,000 units
$ 1 x 100000 = $ 100000 (B)
Inventory holding cost is $ 100/ item/ year
Since, Value electronics need to carry 7692 units throughout the year as a safety stock,
Avg. daily inventory from above would be,
7692/ 28 days (or 4 weeks) = 274 (rounding off)
Annual inventory holding cost would be,
$ 100 X 274 = $ 27400 (C)
Hence, total annual cost would be,
A + B + C
= $ 26000 + $ 100000 + $ 27400 = $ 153400
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