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**

Sharon Ltd has in the past ordered raw
material T in quantities of 3,000 units which is half a year’s
supply. Management has instructed you, an inventory cost
consultant, to advise them as to the most desired order quantities.
The factory closes for 4 weeks annual leave per annum.
You are given the following data:
Inventory usage rate: 125 per week, Lead time: 3 weeks
Unit price: $1.50, Annual requirement: 6,000 units
Order cost: $9.00 per order, Carrying cost: $0.30...

XYZ purchases 20,000 unit of a product each year in lots of
1,000 units per order. The cost of placing an order is $20 and the
cost of carrying one unit of product in inventory is $30 per
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Required:
How many orders is placed per year?
What is the total ordering costs per year?
What is the total carrying cost of the inventory per year?
What is the total cost of carrying and ordering for the
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b. How many orders will be placed during the
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12
Fisk Corporation is trying to improve its inventory control
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Fisk anticipates sales of 84,500 units per year, an ordering cost
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b. How many orders will be placed during the
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c. What will the average inventory be?
d. What is the total cost of...

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b. how many orders will be placed during the year?
c. what will the average inventory be?
d. what is the total cost of ordering and carrying
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Ottis, Inc., uses 731,025 plastic housing units each year in its
production of paper shredders. The cost of placing an order is $30.
The cost of holding one unit of inventory for one year is $15.
Currently, Ottis places 171 orders of 4,275 plastic housing units
per year.
Required:
1. Compute the economic order quantity.
units 1,710
2. Compute the ordering, carrying, and total
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Ordering cost
$__________
Carrying cost
12,825
Total cost
$__________...

Question 3
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RELATED COST (LO 3)
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Required:
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following information:
Annual demand in units
250
Days used per year
250
Lead time, in days
10
Ordering costs
$100
Annual unit carrying costs
$20
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Determine the...

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Details related to Fisk's purchasing are shown below.
Monthly expected purchases (in units) 8,000
Ordering costs (per order) $ 6.25
Carrying costs (per unit) $ 1.24 REQUIRED
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c-2. What will the new total carrying cost
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