Question

Question 1

Khalil is the owner and manager of a hardware store. He sells on average 50 industrial hammers per month. He places an order to buy 50 hammers from a wholesaler at a cost of 20 OMR per unit at the end of each month. However, Khalil orders everything himself and finds that it takes a long time. He estimates that the value of his time spent placing each order is 75 OMR. a. What should be the unit handling cost for hammers in order for Khalil's current inventory management to be optimal according to the EOQ model?

b. What percentage of the unit purchase cost is the handling cost?

c. What is the optimal quantity if the unit handling cost is 20% of the cost of the unit?

d. What is the annual cost of the inventory management policy in this case (described in part

. What is the annual cost of the current inventory management policy (50 per month)?

f. Which policy is better? Justify your answer. g. The wholesaler generally delivers an order within 5 working days (25 working days per month), what is the reorder point according to the current policy (50 per month)

The wholesaler offered Khalil a discount of 2 OMR per unit if the quantity ordered exceeds 200 units and 5 OMR if the quantity is greater than 400 units. The handling cost per unit is 20% of the purchase cost. h. Calculate the optimal order quantity.

i. Calculate the annual cost of this inventory management policy.

Answer 1

	Annual Demand (D)	=	50 x12
		=	600 units
	Cost	=	20
	Order Quantity (Q)	=	50 Units
	Ordering Cost	=	75
	Carrying Cost	=	?
(a)	EOQ	=	2AQ	^ 1/2
	C
	50^2	=	2 x 600 x 5
	C
	C	=	2.4
(b)	%	=	2.4 x 100
	20
(c)	New Carrying Cost	=	20 x 20%
		=	4
	EOQ	=	2AQ	^ 1/2
	C
		=	2 x 600 x 75	^ 1/2
		4
		=	150 Units
(d)	Total Cost	=	D	x 75	+	EOQ	x 4
	EOQ	2
		=	600	x 75	+	150	x 4
		150	2
		=	300+300
		=	600