Question

ABC Inc. orders components for distribution at a monthly demand of 900 units. Holding costs are 15% of the unit cost of $23.75. The ordering cost is $47.35. The company operates 240 days per year.

a) Calculate the economic order quantity (EOQ)
b) Determine the reorder point for components

Answer 1

To calculate the economic order quantity (EOQ), use the formula EOQ = √((2 * Annual Demand * Ordering Cost) / Holding Cost). The EOQ in this case is approximately 154.45 units. To determine the reorder point for components, use the formula Reorder Point = Demand per day * Lead time. The reorder point in this case is 7200 units.

Step-by-step explanation:

To calculate the economic order quantity (EOQ), we can use the formula:

EOQ = √((2 * Annual Demand * Ordering Cost) / Holding Cost)

Using the given information:

Annual Demand = 900 units

Ordering Cost = $47.35

Holding Cost = 15% of $23.75 = $3.56

Substituting these values into the formula:

EOQ = √((2 * 900 * 47.35) / 3.56) = √(84870 / 3.56) ≈ √(23852.81) ≈ 154.45 units

Therefore, the economic order quantity is approximately 154.45 units.

To determine the reorder point for components, we can use the formula:

Reorder Point = Demand per day * Lead time

Using the given information:

Demand per day = Monthly demand / Number of days in a month = 900 / 30 = 30 units

Lead time = Number of days the supplier takes to deliver = 240 days

Substituting these values into the formula:

Reorder Point = 30 * 240 = 7200 units

Therefore, the reorder point for components is 7200 units.