Question

The KDex Company has asked for your help in determining the best order quantity for their top selling unit the DoubleDex. The cost to place an order for the DoubleDex is $78 and the annual holding cost per DoubleDex unit is $7. The cost to transport DoubleDex units to the KDex facility increases as Q increases (because there is a special fixture that must be used to hold each unit that is transported) and increases by approximately $5 per each additional DoubleDex unit shipped in a single shipment. KDex estimates that their annual DoubleDex demand will be 16,800 units per year.

What value would you recommend KDex use for Q if their goal is strictly to minimize the total of their inventory, holding and transport costs for the DoubleDex?

Answer 1

To determine the optimal order quantity for KDex's DoubleDex unit, you need to balance ordering costs and holding costs using a specific formula.

Step-by-step explanation:

The student is asking about determining the optimal order quantity for a product, considering the balance of inventory-related costs. This is a supply chain management problem and can be approached using the Economic Order Quantity (EOQ) model. The formula for EOQ considers several costs: ordering cost (S), holding cost (H), and demand (D). The transportation cost that increases with the order quantity (Q) introduces a variable cost into the usual EOQ calculation, which typically assumes constant costs. To determine the best order quantity for the DoubleDex unit, KDex needs to consider the trade-off between ordering costs and holding costs. The total cost can be minimized by finding the order quantity that balances these costs.

The formula to calculate the optimal order quantity is:

Q = √((2DS) / H)

where Q is the order quantity, D is the annual demand, S is the order cost, and H is the holding cost per unit.

In this case, D = 16,800 units, S = $78, and H = $7. Plugging these values into the formula, we can calculate the optimal order quantity for KDex.