Question

Assume the following: Fixed Ordering Cost: $100 Unit product cost to obtain: $2.00 Sell Price: $5.00...

Assume the following:

Fixed Ordering Cost: $100

Unit product cost to obtain: $2.00

Sell Price: $5.00

Annual holding cost: 30%

Daily Demands: 50 units

Daily demand variance: 4 units

Leadtime: 4 weeks

Service level: 99%

What is the optimal reorder point, R? What is the optimal order quantity?

Business   Operations-Management   
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Homework Answers

Answer #1

Answer:

EOQ:

  • D = annual demand = 50*365 = 18250 units (365days in a year)
  • h = handling cost per unit = 30% of $2 = $0.6
  • S = Ordering cost per order = $100
  • EOQ = optimal ordering quantity = [ (2*D*S) / h ]1/2
  • EOQ = 2466.44 units

Reorder point (ROP):

  • Z value for 99% CI = 2.58
  • Demand during lead time = daily demand * lead time = 50*(4*7) = 1400 units
  • Safety stock = Z * Demand daily variance * (lead time)1/2 = 2.58*4*(28)1/2 = 54.6083
  • ROP= Demand during lead time + Safety stock = 1454.61 (Answer)
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