Question

A company uses 2,500 per year of a certain subassembly that has an annual holding cost of $40 per unit. Each order placed costs $150. The company operates 250 days per year and it has found that an order must be placed with the supplier 5 working days before it can expect to receive that order. For this subassembly, find: (a) the economic order quantity (Round answer to nearest whole number). (b) the annual holding cost. (c) the annual ordering cost. (d) the reorder point.

Answer 1

a. 136.93 units

b. $2,783.60

c. $2,783.63

d. 60 units

Step-by-step explanation:

a. The computation of the economic order quantity is shown below:

`= \sqrt{\frac{2* \text{Annual demand}* \text{Ordering cost}}{\text{Carrying cost}}}`

`= \sqrt{\frac{2* \text{2,500}* \text{\$150}}{\text{\$40}}}`

= 136.93 units

b. The annual holding cost is

= Economic order quantity ÷ 2 × holding cost per order

= 136.93 units ÷ 2 × $40

= $2,738.60

c. The annual ordering cost is

= Annual demand ÷ economic order quantity × ordering cost per order

= $2,500 ÷ 136.93 units × $150

= $2,738.63

d. The reorder point is

= Demand × lead time + safety stock

where, Demand equal to

= Expected demand ÷ total number of days in a year

= 2,500 ÷ 250 days

= 10

So, the reorder point would be

= 10 × 6 + $0

= 60 units

We simply applied the above formulas