Question

Southeastern Bell stocks a certain switch connector at its central warehouse for supplying field service offices. The yearly demand for these connectors is 16,000 units. Southeastern estimates its annual holding cost for this item to be $25 per unit. The cost to place and process an order from the supplier is $70. The company operates 300 days per year, and the lead time to receive an order from the supplier is 2 working days.

a. Find the economic order quantity.

b. Find the annual holding costs.

c. Find the annual ordering costs.

d. What is the reorder point?

Please show all work/steps

Answer 1

Solution:

Annual demand (D) = 16,000 units

Annual holding cost (H) = $25 per unit

Cost of ordering (Co) = $70

Number of working days = 300 days per year

Lead time to receive an order (L) = 2 days

(a) Economic Order Quantity (EOQ):

EOQ = SQRT [(2 x D x Co) / H]

EOQ = SQRT [(2 x 16,000 x $70) / $25]

EOQ = 299.33 or 299 (Rounding off to the nearest whole number)

Economic Order Quantity = 299 units

(b) Annual holding costs:

Annual holding costs = (Economic Order Quantity / 2) x Holding cost

Annual holding costs = (299 / 2) x $25

Annual holding costs = $3,737.5

(c) Annual ordering costs:

Annual ordering costs = (Annual demand / EOQ) x Ordering cost

Annual ordering costs = (16,000 / 299) x $70

Annual ordering costs = $3,745.82

(d) Reorder point:

Reorder point = Daily Demand x Lead time

Daily demand = Annual demand / Number of working days

Daily demand = 16,000 / 300 = 53.33

Reorder point = 53.33 x 2

Reorder point = 106.66 or 107 (Rounding off to the nearest whole number)

Reorder point = 107 units