Requirement of engines = 10 diesel engines each working day of
the month
Days per month = 20 days
Total requirement in a month= 10 diesel engine per working day * 20
working day
= 200 diesel engine per month
Weeks in month = 4 weeks ( assumption)
hence requisition in a month= 4(each on monday morning)
Engines ordered in a monday= 200 engines/4 weeks
= 50 engines
(1) Total cost per year prior to the new price structure when
the diesel engine price was $4800:-
Total engines required= 200 diesel engine per month * 12
months
= 2400 engines
Cost of engines= 2400 engines* $4800 = $11520000
-(A)
Cost of unloading engines into warehouse= 0.25 per hundered
weight* total engines required in a year* 500 pounds
=0.25*2400 engines* 500 pounds
=$300000 -(B)
Order processing cost per requisition= $100
Total requision= Requisition in a month * 12 month
= 4 * 12 = 48 requisitions
So Total order processing cost= 48 requisitions * $100
= $4800 -(C)
outside warehousing cost= Nil (since each order unit is 50 engines. its less than capacity of warehouse)
Expediting cost per requisition= $50
Total requision= 48 requisitions
Total expediting cost= 48 requisitions * $50
= $2400 -(D)
Inventory carrying cost = 38%
Average annual value of inventory= 50 engines* $4800
= $240000
Average inventory = 50 engines((op. inv+cl.inv)/2)
Inventory carrying cost= $240000*38%
= 91200 -(E)
Total cost= A+B+C+D+E
= 11520000+300000+4800+2400+91200
= $11918400
EOQ
The formula for EOQ is:
Q=
where
Q= EOQ units
D= Demand in units (Typically on an annual basis) 2400 unts
S= Order cost (per purchase order) $100
H= Holding cost(per unit, per year) = 4800*38% =1824
Q= (2*2400*100)/ 1824
= 480000/1824
=263.15
=16.22 units
= 17 units (rounded)
Engines ordered in a monday= 200 engines/4 weeks
= 50 engines
Since EOQ= 17 units, MARS was not using EOQ method
(2)
Unit | Total cost | Transporation cost | Cost of unloading | Order processing | O/s warehousing | Expediting cost | Inv. Carrying cost | Total cost |
50 | 11520000 | 3750 | 62.5 | 4800 | 0 | 2400 | 4377600 | 15908612.5 |
100 | 11280000 | 5000 | 125 | 2400 | 0 | 1200 | 4286400 | 15575125 |
150 | 11280000 | 7500 | 187.5 | 1600 | 0 | 800 | 4286400 | 15576487.5 |
200 | 11280000 | 10000 | 250 | 1200 | 0 | 600 | 4286400 | 15578450 |
250 | 10920000 | 12500 | 312.5 | 1000 | 1950 | 500 | 4149600 | 15085862.5 |
300 | 10920000 | 15000 | 375 | 800 | 3900 | 400 | 4149600 | 15090075 |
Cost is lowest for the price of $4550
Hence most preferable ordering quatity will be more than 200.
Preferably 250 units per order.
(3)With purchase discounts, it will be better to order more quanties in an order. It is better for transportation cost also.
but this will increase the inv. holding cost. and afffect EOQ.
EOQ method is not preferable in this case die to high discounts in purchase quantities
(4)Lean philosophy focus on reducing waste.like
the company philosophy might get affect since the firm has to order large quantities due to purchase discounts and trans. cost. Hence it may resukt in inc cost and over processing etc. and incur inv. holding cost.
However this may compensate by purchase discounts
MARS, Inc. (D) In January 2009, Tom Sosa, the purchasing manager, received a telephone call from...