Question

Cress Electronic Products manufactures components used in the automotive industry. Cress purchases parts for use in its manufacturing operation from a variety of different suppliers. One particular supplier provides a part where the assumptions of the EOQ model are realistic. The annual demand is 5000 units, the ordering cost is $80 per order, and the annual holding cost rate is 25%. a. If the cost of the part is $20 per unit, what is the economic order quantity?

b. Assume 250 days of operation per year. If the lead time for an order is 12 days, what
is the reorder point?
c. If the lead time for the part is seven weeks (35 days), what is the reorder point?
d. What is the reorder point for part (c) if the reorder point is expressed in terms of the
inventory on hand rather than the inventory position?

Answer 1

a. Economic order quantity EOQ is 400 units

b. Reorder Point ROP is 240 units

c. Reorder Point ROP is 700 units

d. Reorder Point ROP is 602 units

Explanation:

Given Details

Annual demand(D) is 5000 units

The ordering cost(S) is $80/order

The annual holding cost rate(I) is 25% = 0.25

(a)

Cost of the part is $20 per unit

The economic order quantity EOQ

EOQ =√((2D*S)/(IC))

EOQ = √((2*5000*80)/(0.25*20))

EOQ = 400 units

(b)

Number of days of operation per year

is 250 days

Lead time (LT) for an order is 12 days

The reorder point ROP = D*LT

but LT is 12/250 = 0.048

ROP = 5000*0.048

ROP = 240 unit

(c)

Lead time (LT) for the part is seven weeks (35 days) = 35/250 = 0.14

ROP = D*LT

ROP= 5000*0.14

ROP = 700 unit

(d)

ROP if the reorder point for C above is expressed in terms of the

inventory on hand is

ROP at C which 700 units will be subtracted from annual demand of 5000 units = 4300 units

New Demand is 4300 units

ROP = D * LT at C (35 days)

ROP = 4300 * 35/250

ROP = 602 units

Answer 2

a. 400 unit

b. 240 unit

c. 700 unit

d. 200 unit

Explanation:

The annual demand(D) is 5000 units

The ordering cost(S) is $80/order

The annual holding cost rate(I) is 25%

question (a) says , if the Cost of the part is $20 per unit, what is the economic order quantity?

∴ The economic order quantity will be,

Q = (2 × D × S /IC)^(1/2)

Q= (2*5000*80 / 0.25*20)^(1/2)

Q = 160000^(1/2)

Q = 400 unit

(b)

Lead time(LT) for an order is 12 days

and 250 days of operation per year

The reorder point will be

R = D*LT

R= 5000*(12/250)

R = 240 unit

(c) Lead time for the part is seven weeks (35 days)

R = D*LT

R= 5000*(35/250)

R = 700 unit

(d)

In cases of long lead times, the lead-time demand and thus the reorder point may exceed the economic order quantity Q*. Therefore, the inventory position will not equal the inventory on hand when an order is placed, and the reorder point may be expressed in terms of either the inventory position or the inventory on hand.

so average inventory on hand = Q/2

= 400/2

= 200 unit