A local distributor for a national tire company expects to sell approximately 9,
ID: 470324 • Letter: A
Question
A local distributor for a national tire company expects to sell approximately 9,600 steel-belted radial tires of a certain size and tread design next year. Annual carrying cost is $16 per tire, and ordering cost is $75. The distributor operates 288 days a year.
a. What is the EOQ
b.How many times per year does the store reorder?
c. What is the length of an order cycle?
d. What is the total annual cost if the EOQ quantity is ordered?
D=9,600 tires per year
H=$16 per unit per year
S=$75
a. Qo=(2DS/H)=(2(9,600)75/16)=300 tires
b.Number of orders per year: D/Q = (9,600 tires/year)/(300tires/order)=32 orders
c. Length of order cycle: Q/D = (300 tires)/(9,600 tires/years)= 132 of a year, which is 132 x 288, or nine workdays
d. TC = Carrying cost + ordering co
= (Q/2)H = (D/Q)S
= (300/2)16 + (9,600/300)75
= $2,400 + $2,400
= $4,800
Determine the EOQ by increasing significantly the HOLDING COST between ten to twenty times the amount used by the textbook. Present the formula and results of the new EOQ. You will keep the original demand (9,600 units) and ordering costs, S ($75) the same
Determine a second EOQ by decreasing the ORDERING COSTS to one tenth (1/10) or lower and keeping the original demand and holding costs, H ($16) the same.
Determine a third EOQ by increasing the holding cost to the level you selected and decreasing the ordering cost at the same time based on the last scenario. You keep the demand the same
Study the three scenarios and write a paragraph with your interpretation of results. What is the meaning, based on current business trends and technology, to have increasing holding costs and decreasing ordering costs? What is happening to the EOQ?
Submit one file with the three formulas and results and your concluding thoughts. As a reference, this is an example of a similar analysis done for a different EOQ case.
DATA
Annual Demand (D)= 1000 units per year Ordering
Cost (S)= $5.00 per order
Holding Costs (H)= $1.25 per unit
Q=(2DS/H)^0.5
Q=(2*1000*5/1.25)^0.5
Q= 89.4427191
DATA
Annual Demand (D)= 1000 units per year
Ordering Cost (S)= $1.00 per order
Holding Costs (H)= $6.25 per unit
Q=(2DS/H)^0.5
Q=(2*1000*1/6.25)^0.5
Q= 17.88854382
DATA
Annual Demand(D)= 1000 units per year
Ordering Cost (S)= $0.02 per order
Holding Costs (H)= $62.00 per unit
Q=(2DS/H)^0.5
(2*1000*0.02/62)^0.5
Q= 0.803219329 or one unit which is the equivalent to order when it is needed (JIT
Explanation / Answer
i) Increasing Holding cost by 15 times of $16 per unit per year
D=9,600 tires per year
H= 15 x $16 = $240 per unit per year
S=$75
a. Qo=(2DS/H)=(2(9,600)75/240)=78 tires
b.Number of orders per year: D/Q = (9,600 tires/year)/(78 tires/order)= 123 orders
c. Length of order cycle: Q/D = (78 tires)/(9,600 tires/years)= 2.43 workdays
d. TC = Carrying cost + ordering co
= (Q/2)H = (D/Q)S
= (78/2)240 + (9,600/78)75
= $9360 + $9231
= $18,591
ii) Reducing ordering cost by less than 1/10 of $75 per order
D=9,600 tires per year
H= $16 per unit per year
S=$75 x 1/10 = $7.5 per order
Consider S = $7 per order
a. Qo=(2DS/H)=(2(9,600)7/16)= 92 tires
b.Number of orders per year: D/Q = (9,600 tires/year)/(92 tires/order)= 105 orders
c. Length of order cycle: Q/D = (92 tires)/(9,600 tires/years)= 2.74 workdays
d. TC = Carrying cost + ordering co
= (Q/2)H = (D/Q)S
= (92/2)16 + (9,600/92)7
= $736 + $730
= $1466
iii) Considering the holding cost and ordering cost as per (i) and (ii)
D=9,600 tires per year
H= $240 per unit per year
S= $7 per order
a. Qo=(2DS/H)=(2(9,600)7/240)= 7.48 ~ 8 tires
b.Number of orders per year: D/Q = (9,600 tires/year)/(8 tires/order)= 1200 orders
c. Length of order cycle: Q/D = (8 tires)/(9,600 tires/years)= 0.24 workdays
d. TC = Carrying cost + ordering cost
= (Q/2)H = (D/Q)S
= (8/2)240 + (9,600/8)7
= $960 + $8400
= $9360
Summary of three scenarios:
Data
Original
Scenario (i)
Scenario (ii)
Scenario (iii)
Annual Demand
9600
9600
9600
9600
Holding Cost (per unit per year)
$16
$240
$16
$240
Ordering Cost
$75
$75
$7
$7
EOQ
300 tires
78 tires
92
8
Number of orders per year
32 orders
123 orders
105 orders
1200 orders
Length of cycle
9 workdays
2.43 workdays
1.74 workdays
0.24 workdays
Annual Holding cost
$2400
$9360
$736
$960
Annual Ordering Cost
$2400
$9231
$730
$8400
Total Cost
$4800
$18,591
$1466
$9360
According to current business trends the life cycle of the products are reducing drastically resulting in high obsolescence value. Also due to storage constraint the holding cost of material is increasing. These have impact on business in terms of increased inventory carrying cost. Also due to technological advances the sourcing and purchasing efforts for the firm has reduced dramatically. Through internet and real-time software the procurement cost has been reduced.
As seen in scenario (i) increase in holding cost has reduced the optimal order quantity but with original ordering cost the total inventory cost is very high. In scenario (ii) the decrease in ordering cost has also resulted in reduced optimal quantity. Also the total inventory cost is very low. In scenario (iii) due to increased holding cost and reduced ordering cost the optimal order quantity is reduced to single digit units per order that is 8 units per order. But have increased frequency of ordering. This situation is similarly to the operating condition of JIT. JIT aims for reduced order size and frequent order delivery.
Data
Original
Scenario (i)
Scenario (ii)
Scenario (iii)
Annual Demand
9600
9600
9600
9600
Holding Cost (per unit per year)
$16
$240
$16
$240
Ordering Cost
$75
$75
$7
$7
EOQ
300 tires
78 tires
92
8
Number of orders per year
32 orders
123 orders
105 orders
1200 orders
Length of cycle
9 workdays
2.43 workdays
1.74 workdays
0.24 workdays
Annual Holding cost
$2400
$9360
$736
$960
Annual Ordering Cost
$2400
$9231
$730
$8400
Total Cost
$4800
$18,591
$1466
$9360
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.