Question

Exercise 10-1 (from Text 15.24) Economic order quantity

The calculation of an Economic Order Quantity uses a formula which balances the cost of ordering stock (PER ORDER which may include research, account handling, supplier meetings and processing time AND if imported, import duties and customs clearance fees etc.) against the UNIT cost of holding inventory (these costs may include warehouse rent, insurance, storage costs etc.). The EOQ is the point where the two costs are equally balanced such that it minimises all costs involved.

1. For each of the following independent cases, use the EOQ equation to calculate the economic order quantity:

	Case A	Case B	Case C
Annual requirement (in units)	7290	4563	150
Incremental cost per order	$500	$10	$100
Annual carrying cost per unit	$9	$15	$12
Lead time (assume 50 weeks in a year)	4 Weeks	2 Weeks	4 Weeks
Safety stock levels required	400	40	12

EOQ = ( 2*7290*500/9)^0.5= 900 ( for a), 78( for b), 50 ( for c)

2. Calculate the Reorder point for all three case with safety stock

Answer 1

Reorder Point = (Average Weekly sale * Lead Time) + Safety Stock

a) Reorder Point = ((7290 units / 50 weeks) * 4 weeks) + 400 units

= (145.8 * 4) + 400

= 583.2 + 400

= 983.2 or 983 units

b) Reorder Point = ((4563 units / 50 weeks) * 2 weeks) + 40 Units

= (91.26 * 2) + 40 units

= 182.52 + 40

= 222.52 or 223 Units

c) Reorder Point = ((150 units / 50 weeks) * 4 weeks) + 12 Units

= (3 * 4) + 12

= 12 + 12

= 24 Units

Note :- (Average Weekly Sales = Annual Requirement / 50 weeks in years)