Question

Michigan State Figurine Inc. (MSF) sells crystal figurines to Spartan fans. MSF buys the figurines from a manufacturer for $22 per unit. They send orders electronically to the manufacturer, costing $36 per order and they experience an average lead time of nine days for each order to arrive from the manufacturer. Their inventory carrying cost is 20 percent. The average daily demand for the figurines is two units per day. They are open for business 250 days a year. The supplier decides to offer a volume discount. They will sell the crystal figurines at $8 per unit for orders of 250 units or more. Answer the following questions:

a. How many units should the firm order each time? Assume there is no uncertainty at all about the demand or the lead time. (Round your answer to the nearest whole number.)

b. How many orders will they place in a year?

c. What is the average inventory?

d. What is the annual ordering cost?

e. What is the annual inventory carrying cost?

Answer 1

GIVEN DATA:

Selling price per unit : $22 ;   

Ordering cost per order : $36 ;

Average lead time : 9 Days ;

Inventory carrying cost - 20% = 22*20% = $4.4 ;

Average demand = 250*2 per day = 500 Units ;

If order is 250 or more - Rate per unit is $8.

Answer (a):

Economic order quantity = 2AO/C =2*500*36/4.4 = 36000/4.4 = 8181.8181 = 90.44 =90 Units

Answer (b):

No of orders = annual demand/order quantity = 500/90 = 5.55

Answer (c):

Average inventory = Economic order quantity(To meet the orders which were made by customers) = 90 Units

Answer (d):

Ordering Cost = Number of orders *Ordering cost per order = 5.55*36 = 200$

Answer (e):

Carrying cost = Annual Demand*carrying cost per unit = 500*4.4 = 2200