Question

Problems: Economic Order Quantity

1. Demand for the Deskpro computer at Best Buy is 1,000 units per month. Best Buy incurs a fixed order placement, transportation, and receiving cost of $4,000 each time an order is placed. Each computer costs Best Buy $500 and the retailer has a holding cost of 20 percent.

A. Evalua te the number of computers that the store manager should order in each replenishment lot.

B. What is the total inventory cost?

C. What is the cycle inventory?

D. Determine the average flow time in months.

E. How many orders should Best Buy place in a year in order to minimize the total cost of inventory?

2. Harley - Davidson has its engine assembly plant in Milwaukee and its motorcycle assembly plant in Pennsylvania. Engines are transported between the two plants using trucks, with each trip costing $1,000. The motorcycle plant assembles and sells 300 motorcycles each day. Each engine costs $500; Harley incurs a holding cost of 20 percent per year.

A. How many engines should Harley load onto each truck?

B. What is the cycle inventory of engines at Harley?

C. What is the total inve ntory cost?

D. Determine the average flow time in days.

Answer 1

1)

D = 1000 * 12 months = 12000 units yearly.

S = $ 4000

C = $ 500

h = 0.2

Optimal order quantity Q = Square root of 2 * D * S / h * C = Sqrt of 2 *12000 * 4000 / 0.2 * 500 = 980

Order frequency = D/Q = 12000/980 = 12.24

Cycle inventory = Q/2 = 980/2 = 490

Average flow time = Q/2*D   = 980/2 * 12000 = 0.041

Annual ordering & Holding cost = (D/Q) S + (Q/2)h*C = 48990 + 48990 = $97980 (Total cost)

2)

D = 3000 units yearly

S = $1000

C = $500

h = 0.2

Same mentioned formulae for above solution and applied we get,

Q = 244.979

Order frequency = D/Q = 12.247

Cycle inventory = Q/2 = 122.474

Total cost = Annual ordering and holding cost = 244.494.90

Average flow time = 0.0408