Question

Apply the Concept

Reparan Corporation does warranty work for a major producer of surface tablets. The following values apply for a part used in the repair of the surface tablets (the part is purchased from external suppliers):

D = 100,000 units

Q = 500 units

P = $80 per order

C = $4 per unit

Required:

1. Calculate the following:

Number of orders:

Ordering cost: $

Average inventory:

Carrying cost: $

Total inventory cost: $

2. Calculate the following:

EOQ =

Ordering cost for EOQ = $

Carrying cost for EOQ = $

Total Cost for EOQ = $

3. Suppose Reparan Corporation enters into an exclusive supplier agreement with one supplier who will supply all of the demands with smaller more frequent orders. Under this arrangement, the ordering cost is reduced to $0.80 per order. Calculate the following:

EOQ =

Ordering cost for EOQ = $

Carrying cost for EOQ = $

Total Cost for EOQ = $

The above results show that smaller, more frequent orders can significantly reduce  the cost of inventory. This result foreshadows the power of JIT purchasing .

Answer 1

1) calculations are as follows;

No.of orders = Annual demand/volume per order

= 100000/500

= 200 orders

Ordering cost = no.of orders*cost per order

= 200*80 = 16000

Average inventory = 100000/2 = 50000 units

Carring cost = no.of units*cost per unit

= 500*4 = 2000

Total inventory cost = ordering cost+carrying cost

= 16000+2000 = 18000

2)calculation are as follows;

EOQ = 2000 units

ordering cost for EOQ = 2000*80 = 160000

carrying cost for EOQ = 2000*4 = 8000

total cost for EOQ = 160000+8000 = 168000

3)calculation are as follows;

EOQ = 200 UNITS

ordering cost fro EOQ = 200*.80 = 160

carrying cost fro EOQ = 200*4 = 800

total cost for EOQ = 160+800 = 960