Question

Assume a car dealer has demand for 1,000 cars per year. The unit purchase cost is $20,000. The fixed cost for each order of cars is $5,000. It takes 2.5 weeks to receive an order. The holding cost equals 5% of the unit purchase cost per car per year (assume 12 months per year and 4 weeks per month).

a. How many cars should the dealer buy per order?

Answer 1

Answer:-

Economic Order Quantity-(EOQ)

= √ (2* Annual usage * ordering cost) / holding cost

= √ (2 * 1,000 * 5,000) / 1000

= 100 Units

So optimal usage quantity is 100 Units

Note :- Holding cost = 5% of cost price = 5% * $20,000 = $1,000

Additional:

Re-order level point = (average Weeks usage * lead time) + safety stock

Average daily usage = annual quantity / 52 weeks

                                     = 1,000 / 52 weeks = 19.31

ROP = (19.31* 2.5 weeks ) +0

         = 48.28 Units