Question

Solve in ExcelQM

Barbara Bright is the purchasing agent for West Valve Company. West Valve sells industrial valves and fluid control devices. One of the most popular valves is the Western, which has an annual demand of 4,000 units. The cost of each valve is $90, and the inventory carrying cost is estimated to be 10% of the cost of each valve. Barbara has made a study of the costs involved in placing an order for any of the valves that West Valve stocks, and she has concluded that the average ordering cost is $25 per order. Furthermore, it takes about two weeks for an order to arrive from the supplier, and during this time, the demand per week for West valves is approximately 80.

(a) What is the EOQ?

(b) What is the ROP?

(c) Is the ROP greater than the EOQ? If so, how is this situation handled?

(d) What is the average inventory? What is the annual holding cost?

(e) How many orders per year would be placed? What is the annual ordering cost?

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Answer 1

1. EOQ = Square root (2AO / Inventory Cost)

A = Annual Demand

O = Oredering Cost

EOQ = Square root (2* 4000 * 25 / $90 * 10%)

EOQ = 149.07 Units

2. ROP = 2 * Weekly demand

ROP = 2 * 80 = 160 Units

3. Yes ROP is greater than EOQ then the company should calculate the opportunity loss because of following EOQ or ROP. If the opportunity loss is higher in either case then i would suggest to opt for other parametre

4. Average Inventory = EOQ / 2 = 149.07 / 2 = 74.54

Annual Holding Cost = Inventory Cost * Average Inventory = 90 * 0.10 * 74.535

Annual Holding Cost = $670.82

5. Number of Orders would be placed = Annual Demand / EOQ = 4000 / 149.07

NUmber of Orders would be placed = 26.83 orders

Annual ordering cost = Number of Orders * Oreder cost = 26.83 * 25 = $670.75