Question

Michigan State Figurine Inc. (MSF) sells crystal figurines to Spartan fans. MSF buys the figurines from a manufacturer for $14 per unit. They send orders electronically to the manufacturer, costing $25 per order and they experience an average lead time of nine days for each order to arrive from the manufacturer. Their inventory carrying cost is 20 percent. The average daily demand for the figurines is three units per day. They are open for business 250 days a year. Answer the following questions:

a. How many units should the firm order each time? Assume there is no uncertainty at all about the demand or the lead time. (Do not round intermediate calculations. Round your answer to the nearest whole number.)

b. How many orders will they place in a year? (Use your rounded answer from Part a. Round your answer to 2 decimal places.)

c. What is the average inventory? (Use your rounded answer from Part a. Round your answer to 1 decimal place.)

d. What is the annual ordering cost? (Use your rounded answer from Part b. Round your answer to 2 decimal places.)

e. What is the annual inventory carrying cost? (Use your rounded answer from Part a. Round your answer to 2 decimal places.)

Answer 1

d = average daily demand = 3 per day
D = annual demand = 3 x 250 = 750
C = cost of item = $14
S = ordering cost = $25
L = average lead time = 9 days
H = carrying cost per item per annum = 20% x $14 = $2.8

(a)

Economic order Quantity (Q*) = (2.D.S/H)^1/2 = SQRT(2*750*25/2.8) = 116

(b)

No. of order placed = D/Q* = 750/116 = 6.47

(c)

Average inventory = Q/2 = 58.0 units

(d)

Annual ordering cost = No. of orders per annum x $25 = 6.47 x $25 = $161.75

(e)

Annual carrying cost = (Q/2) x H = 58 x $2.8 = $162.40