Question

Brown Manufacturing uses 2,400 units of a product per year on a continuous basis. The product...

Brown Manufacturing uses 2,400 units of a product per year on a continuous basis. The product carrying costs are RM60 per year and ordering costs are RM250 per order. It takes 20 days to receive a shipment after an order is placed and the firm requires a safety stock of 8 days of usage in inventory.

Required:

  1. Calculate the economic order quantity (round up to the nearest whole unit.
  2. Calculate the total cost per year to order and carry this item.
  3. Its supplier has notified Brown Manufacturing that if the firm increases its order quantity by 58 units, they will give it a discount. Calculate the dollar discount that the suppliers will have to give Brown Manufacturing to result in a net benefit to the company.
Business   Operations-Management   
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Answer #1

Ans: Economic Order Quantity:

Economic order quantity means the level of inventory that minimizes both total ordering cost and total holding cost.

Calculations are hand written:

Ans (a): Economic Order Quantity = 142 units

Ans (b): Total cost per year to order and carry this item = $8,485

Ans (c): The yearly discount will be $515 to make a decision neutral

Dollar Discount = $515

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