Question

M. Cotteleer Electronics supplies microcomputer circuitry to a company that incorporates microprocessors into refrigerators and other home appliances. One of the components has an annual demand of 265 units, and this is constant throughout the year. Carrying cost is estimated to be $1.25 per unit per year, and the ordering cost is $19 per order.

a) To minimize cost, how many units should be ordered each time an order is placed?

b) How many orders per year are needed with the optimal policy?

c) What is the average inventory if costs are minimized?

d) Suppose that the ordering cost is not $19, and Cotteleer has been ordering 125 units each time an order is placed. For this order policy (of Q = 125) to be optimal, determine what the ordering cost would have to be.

Answer 1

Answer and Explanation:

The computation is shown below:

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{265}* \text{\$19}}{\text{\$1.25}}}`

= 90 units

b. The number of orders would be equal to

= Annual demand ÷ economic order quantity

= 265 ÷ 90 units

= 3 orders per year

c. The average inventory is

= Economic order quantity ÷ 2

= 90 units ÷ 2

= 45 units

d. Now in this we have to find out the ordering cost which is shown below by applying the economic order quantity formula

`Economic\ order\ quantity = \sqrt{\frac{2* \text{Annual demand}* \text{Ordering cost}}{\text{Carrying cost}}}`
`125\ units = \sqrt{\frac{2* \text{265}* \text{ordering\ cost}}{\text{\$1.25}}}`

After squaring both the sides, the ordering cost is $36.85