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).

c. How many cars should be on hand when the dealer places an order?

Answer 1

How many cars should be on hand when the dealer places an order.In other words the question is asking us to calculate the Re-order Level of the car.

Maximum Re-order period is the maximum lead time=2.5weeks

Maximum Consumption is the Annual Demand=1000 cars

Since lead time is given in weeks and demand is given in annual terms, we need to convert annual demand into weekly demand.We do so by dividing the annual demand by 52 as 1 year has 52 weeks.

So, weekly demand of cars=1000/52weeks           (Since there are 52 weeks in a year)

Re-order level= 2.5*(1000/52) = 48 Cars approx

So the dealer will place an order when the inventory(CAR) on hand reaches 48.