Question

Knutson Products Inc. is involved in the production of airplane parts and has the following​ inventory, carrying, and storage​ costs:

1. Orders must be placed in round lots of 100 units.

2. Annual unit usage is150,000. ​(Assume a​ 50-week year in your​ calculations.)

3. The carrying cost is 25 percent of the purchase price.

4. The purchase price is ​$10 per unit.

5. The ordering cost is ​$200 per order.

6. The desired safety stock is 4000 units.​ (This does not include​ delivery-time stock.)

7. The delivery time is 1 week.

Given the foregoing​ information: a. Determine the optimal EOQ level.

b. How many orders will be placed​ annually?

c. What is the inventory order​ point? (That​ is, at what level of inventory should a new order be​ placed?)

d. What is the average inventory​ level?

e. What would happen to the EOQ if annual unit sales doubled​ (all other unit costs and safety stocks remaining​ constant)? What is the elasticity of EOQ with respect to​ sales? (That​ is, what is the percentage change in EOQ divided by the percentage change in​ sales?)

f. If carrying costs​ double, what will happen to the EOQ ​level? (Assume the original sales level of 150,000 ​units.) What is the elasticity of EOQ with respect to carrying​ costs?

g. If the ordering costs​ double, what will happen to the level of EOQ​? ​(Again assume original levels of sales and carrying​ costs.) What is the elasticity of EOQ with respect to ordering​ costs?

h. If the selling price​ doubles, what will happen to EOQ​? What is the elasticity of EOQ with respect to selling​ price?

Answer 1

a) EOQ = sqrt (2* annual unit * Ordering cost per unit/ (price*carrying cost) )

= sqrt (2*150000 * 200 / (10*0.25))

=4898.97

As Orders must be placed in multiples of 100 units , quantity of 4900 units is the Optimal Economic Order quantity

b) No of Orders = 150000 / 4900 = 30.61 orders per year

c) Order point = safety stock + weekly usage* lead time in weeks

= 4000 units + 150000/50*1

=7000 units

d) Average Inventory level = safety stock + order quantity/2

=4000+4900/2 = 6450 units