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

Question

160 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 $80/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 transportation for the truck scenario.

Explanation / Answer

First we need to calculate the EOQ

EOQ = SQRT (2 × Quantity × Cost per Order / Carrying Cost per Order) = SQRT(2 x 100000 x 2000 / 80) = 2236

Orders to be placed in a year = 100000 / 2236 = 45 orders

Annual cost of transportation is 2236 x 2 per order.

Hence,

Annual transportation cost = 2236 x 2 x 45 = $201240

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