Question

A manufacturer buys two types of parts from the same supplier.

Part A costs € 5 per unit and part B costs € 38 per unit. The order costs equals € 350 both for part A and B. The inventory holding cost is based on the annual financing cost and equals 25%. The manufacturer requires 20000 units of A and 14000 units of B per year. Assume demand is constant throughout the year.

1. Determine the optimal order quantity for A and B if both parts are ordered separately. Calculate the total annual cost linked to this way of working (stock outs are not allowed).

2. If both parts are ordered at the same time, the order cost has to be paid only once.

1.Calculate the total annual cost if both parts are ordered in the way A would normally be ordered.

2a.Calculate the total annual cost if both parts are ordered in the way B would normally be ordered.

2b.Determine the optimal lot sizes when both are ordered at the same time. Calculate the total annual cost linked to this way of working.

Answer 1

1.The optimal order quantity or Economic order quantity EOQ:

Part A:

Ordering Cost(S)=350

Carrying Cost(H)=20000 X 5 X 25%=25000

Annual Units(D)=20000 Units

=23.66 units=24 units (approx)

No.of Orders=20000/24=833.33=834 Orders

Set Up cost=834 X 350 = 291900

Holding Cost=25000

Total annual cost = Setup cost + Holding cost

=291900+25000=316900

Part B:

Ordering Cost(S)=350

Carrying Cost(H)=14000 X 38 X 25%=133000

Annual Units(D)=14000 Units

=8.58 units=9 units (approx)

No.of Orders=14000/9=1555.55=1556 Orders

Set Up cost=1556 X 350 = 544600

Holding Cost=133000

Total annual cost = Setup cost + Holding cost

=544600+133000=677600

2.