Question

Bearkat Industries purchases golden lawn chairs from House of Chairs. Annual demand is 30,000 units and they cost $120.00 per unit. When placing an order, Bearkat assumes an order cost of $61.00 per order and a holding cost is 5% per year. House of Chairs promises a lead-time of 4 days. When calculating safety stock, assume a standard deviation of 9 units and a target service level of 98%. The company is open 300 days a year.

1. Calculate the EOQ?

Answer 1

Using the Economic Order Quantity formula, Bearkat Industries should order approximately 781 units to minimize the sum of the order and holding costs for golden lawn chairs from House of Chairs.

Step-by-step explanation:

To calculate the Economic Order Quantity (EOQ) for Bearkat Industries, we use the EOQ formula:

EOQ = √((2 x Demand x Order Cost) / Holding Cost Rate)

Where:

• Demand is 30,000 units per year
• Order Cost is $61.00 per order
• Holding Cost Rate is 5% per year of the cost per unit

The cost per unit is $120.00, so the annual holding cost per unit is 5% of $120.00, or $6.00. Plugging these values into the EOQ formula, we get:

EOQ = √((2 x 30,000 units x $61.00) / $6.00)

EOQ = √(3,660,000 / $6.00)

EOQ = √610,000

EOQ ≈ 781 units

Therefore, the Economic Order Quantity (EOQ) is approximately 781 units.