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 is 250,000 ​(Assume a​ 50-week year in your​ calculations.)

3. The carrying cost is 15 percent of the purchase price.

4. The purchase price is ​$20 per unit.

5. The ordering cost is ​$400 per order.

6. The desired safety stock is 8,000 units.​ (This does not include​ delivery-time stock.)

7. The delivery time is 2 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 250,000 ​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 =

where, A = annual usage in units

O = ordering cost per order

C = carrying cost per order

EOQ = = 8164.97 units = 8165 units

b)

Order lot =100 units

Annual demand = 250000

No of orders = demand / lot = 250000/100 = 2500 units

c)

Lead Time Demand + Safety Stock = Reorder Point

Lead time demand = lead time * avg daily sales = 14 * 1000 = 14000

Reorder point = 14000+8000 = 22000 units

d)

Average Stock Level = Minimum stock Level + 1/2 of Reorder Quantity

= 8000 + 8165/2 = 12082.5 units