Question

Cheryl Druehl has asked you to help her determine the best ordering policy for a new product. The demand for the new product has been forecasted to be about 1,000 units annually. To help you get a handle on the carrying and ordering costs, Cheryl has given you the list of last year's costs. She thought that these costs might be appropriate for the new product Cost Factor Taxes for the warehouse Receiving and incoming inspection New product development Acct. dept. costs to pay invoices Inventory insurance Product advertising Spoilage Sending purchasing orders Cost ($) Cost ($ Cost Factor Warehouse supplies Research and development Purchasing salaries & wages Warehouse salaries & wages Pilferage of inventory Purchase order supplies Inventory obsolescence Purchasing dept. overhead 2,000 1,500 2,500 500 280 2,750 30,000 12,800 800 600 800 500 750 300 800 1,000 She also told you that these data were compiled for 10,000 inveentory items that were carried or held during the year. You have also determined that 400 orders were placed last year. Your job as a new operations management graduate is to help Cheryl determine the economic order quantity for the new product EOQ units (round your response to the nearest whole number).

Answer 1

ANSWER

As per the given question,

Separate out the holding costs as shown below: Taxes for the warehouse $2,000 Inventory insurance $600 Spoilage $750 Warehouse supplies $280 Warehouse salaries and wages $12,800 Pilferage of inventory $800 Inventory obsolescence $300 Total holding costs $17,530

the holding cost per Given that 10,000 inventory items were handled during the year, calculate unit per year as follows: 17,530 2x = $1.753 per unit per year 10,000 H =

Separate out the ordering costs as shown below. Receiving and incoming inspection $1,500 Acct. dept. costs to pay invoices $500 Sending purchase orders $800 Purchasing salaries and wages $30,000 Purchase order supplies $500 Purchasing dept. overhead $1,000 Total ordering costs $34,300

Given that 400 orders were placed last year, calculate S, the ordering cost per orders as follows.

S= $34,300/400 = $85.75 per order

Substitute in equation (1), the values of D=1000,S= $85.75 and H= $1.753 to obtain EOQ,

& x1000 $85.75 V $ 1.753 171500 $1.753 V - 97832.28 = 312:18 The for Economic order quantity new product is 312.78 Units the