Question

Demand for a specific design of dinning sets has been fairly large in the past several years and Statewide Furnishings, Inc. usually orders new dinning sets 10 times a year. It is estimated that the ordering cost is $400 per order. The carrying cost is $50 per unit per year. Furthermore, State Wide Furnishings, Inc. has estimated that the stock out cost is $120 per unit per year. Based on forecast, the annual demand is 600 units. State Wide Furnishings, Inc. has 350 working days in a year and its lead time is 14 working days. Assume the inventory policy of Statewide Furnishings, Inc. does not allow stock out. Determine the economic order quantity.

1. Assume shortage is allowed and the store manager is sure that shortages will not become lost sales, determine the maximum allowable shortage.
a. 117.
b. 98.
c. 34.
d. 24.
2. Assume shortage is allowed and the store manager is sure that shortages will not become lost sales, determine the annual ordering cost.
a. 592.82.
b. 1472.01.
c. 2051.28.
d. 4116.11.
e. none of the above.
3. Assume shortage is allowed and the store manager is sure that shortages will not become lost sales, determine the annual holding cost.
a. 592.82.
b. 1472.01.
c. 2051.28.
d. 4116.11.
e. none of the above.
4. Assume shortage is allowed and the store manager is sure that shortages will not become lost sales, determine the annual shortage cost.
a. 592.82.
b. 1472.01.
c. 2051.28.
d. 4116.11.
e. none of the above.
5. Assume shortage is allowed and the store manager is sure that shortages will not become lost sales, determine the annual total relevant, including ordering, holding and shortage, cost.
a. 592.82.
b. 1472.01.
c. 2051.28.
d. 4116.11.
e. none of the above.
6. Assume shortage is allowed and the store manager is sure that shortages will not become lost sales, determine the reorder point.
a. 10.
b. –10.
c. 34.
d. 24.
e. none of the above.

Answer 1

1. a. 117.

2. $2,051.48

3. 592.82

4. 1472.01

5. d. 4116.11

6. d. 24

Explanation:

Economic Order Quantity :
`\sqrt{(2 * Annual Demand *ordering cost)/(Holding cost per unit ) ( (Holding cost + Shortage Cost)/(Shortage cost )) }`

Economic order quantity is
`\sqrt{(2 * 600 * 400)/(50) ((50 + 120)/(120) )}`

EOQ = 117

2. ordering cost :

( total demand / EOQ ) * Ordering cost

( 600 / 117 ) * 400 = $2051.28

3. Holding cost :

Total demand * holding cost per unit

= 592.82

Reorder Point = Daily Demand * lead time

Reorder point = 600 / 350 * 14 = 24