Question

48.    Zip Games purchases blank DVD disks onto which it copies its software for sale through its mail order operation. A disk costs Zip $ 0.60. Processing an order for more disks cost $25. Zip uses 120,000 disks annually, and the annual inventory holding cost is 25% of the cost per disk. The lead time is two weeks.

SHOW WORK FOR EACH PLEASE

1. Find the optimal order quantity.
2. How many orders are placed annually?
3. How frequently should orders be placed? (in days)

d.    What is the reorder point?

e.    What is the total annual cost?

Answer 1

Annual Demand D = 120000

Unit Cost P = 0.60

Ordering Cost S = 25

Holding Cost H = 25%*P = 25%*0.60 = 0.15

a)

Optimal Order quantity Q = EOQ = (2DS/H)^(1/2)

Q = (2*120000*25/0.15)^(1/2)

Q = 6324.56 disks

Q = 6325 disks

b)

Number of Orders N = D/Q = 120000/6325 = 18.97 orders = 19 orders

c)

Days Between Orders = Q/Daily demand = 6325/(120000/365) = 19.24 days = 19 days

d)

Reorder Point ROP = Daily Demand*Lead Time

ROP = (120000/365)*2*7

ROP = 4602.74

ROP = 4603 units

e)

Total cost (including purchasing) = (D/Q)*S + (Q/2)*H + P*D

Total cost = (120000/6325)*25 + (6325/2)*0.15 + 120000*0.60

Total cost = 72948.68