What would your total annual cost be if you ordered 4 times a year? What is the cost difference between using the EOQ model and ordering 4 times a year?

A new manager is hired and she has never used the EOQ method. She does the math and realizes that using the EOQ method requires that 50 orders be placed yearly (10,000 / 200 = 50). She wants to simplify the ordering process and tells you to only order once a quarter or 4 times a year. What would your total annual cost be if you ordered 4 times a year? What is the cost difference between using the EOQ model and ordering 4 times a year? Answer: First, find Q. Q = Demand 10,000 / 4 orders per year = 2500 is the quantity ordered. Holding cost = (2500 / 2) x 25 = $31,250 Ordering Cost = (10,000 / 2500) x 50 = $200 Total Annual Cost not Using EOQ = $31,450 Cost difference (savings) = $31,450 – $5,000 = $26,450 savings if you use the EOQ method. Question 4 Liz orders her tires 8 times a year and believes it to be more efficient than using the EOQ method. Demand is 15,000 annually, annual carrying costs are $20 per tire, and ordering cost per order is $25. What is the total annual cost using EOQ, total annual cost not using EOQ, and the total cost difference between the two methods? Answer: Step 1 – must calculate total cost using EOQ EOQ = square root of 2(15,000)(25) / 20 = 193.65 Holding = (Q/2) x holding cost = (193.65/2)(20) = $1,936.50 Ordering = (D/Q) x Ordering cost = (15,000/193.65)(25) = $1,936.50 Total = $1936.50 + $1936.50 = $3,873.00 Step 2 – must calculate total cost not using EOQ. To do this you must substitute the EOQ for Q. Liz wants to order 8 times a year and if we have 15,000 tires as our forecast, the quantity she will order each time is 15,000 / 8 = 1,875 tires. Holding = (Q/2) x holding cost = (1875/2) (20) = $18,750 Ordering = (D/Q)x carrying cost = (15,000/1875)(25) = $200 Total = $18,750 + $200 = $18,950 Step 3 – Calculate the difference between the two methods? $18,950 – $3,873 = $15,077 difference if you use the EOQ method Question 5 A medium-sized electronics store uses a reorder point of 30 televisions. Demand during lead time has been 60 sets 10 percent of the time; 40 sets 30 percent of the time, and 30 sets 40 percent of the time. The holding costs are $75.00 per unit, the stockout cost is $125.00, optimum number of orders per year is 8. What did you calculate for the lowest cost and at what reorder point? Safety Stock Holding cost Stockout Cost 30(0) 0 (10)(.3)(125)(8) = 3000 (30)(.1)(125)(8) = 3000 Total Cost 40(10) (20)(.1)(125)(8) = 2000+750 $2,750.00 0 $2,250.00 10 x 75=$750 60 (30) 30 x 75 =$2250 Best reorder point is 60 as $2250.00 is least expensive cost.

 

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