Question

Using the data from problem 11, HTC is able to negotiate a reduction in the fixed ordering costs to $250.00 per order, but HTC decides to carry a safety stock of 21 days of memory chip sales. With the reduced fixed ordering cost and the increased average inventory due to the safety stock carried, what is the additional total inventory costs due to the decision to balance out uncertainty by carrying the specified safety stock? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

PROBLEM 11

Hi Tech Corporation (HTC) expects to order 295,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $350 per order; the purchase price per chip is $32; and the firm’s inventory carrying costs is equal to 18 percent of the purchase price. What is the economic ordering quantity for chips? Enter your answer rounded to two decimal places. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

Answer 1

First solving Problem 11 and then will solve the other question for your easy understanding.

11

EOQ=((2*annual qty*fixed cost per order)/annual holding cost per unit)^(1/2)

EOQ=((2*295000*350)/(32*0.18))^(1/2)

EOQ = 5987.54

Total inventory cost = Ordering cost + Inventory cost = (D/ EOQ)*S + (EOQ/2)*H = (295000/5987.54) *350 + (5987.54/2)*5.76= $ 34,488.26

Now, Solving your question:

Changed ordering cost = 250

EOQ=((2*annual qty*fixed cost per order)/annual holding cost per unit)^(1/2)

EOQ=((2*295000*250)/(32*0.18))^(1/2)

EOQ = 5060.40

Daily Demand = 295000/365 = 808.22

Safety stock = 808.22*21 = $16,972.62

Total inventory cost = Ordering cost + Inventory cost + Safety stock cost = (295000/5060.4) *250+ (5060.4/2)*5.76+ 16972.62*5.76 = 126,910

Difference in inventory cost = 126910 - 34,488.26 = $ 92421.9