Question

Demand for the Deskpro computer at Best Buy is 1,000 units per month. Best Buy incurs a fixed order placement, transportation, and receiving cost of $4,000 each time an order is placed. Each computer costs Best Buy $500 and the retailer has a holding cost of 20 percent.

The store manager orders in lots of 200 units for each replenishment order. Calculate:

1.         The number of times the manager should place an order (order frequency) to meet the annual demand.  

2.         The annual ordering cost.

3.         The annual holding cost.

4.         Is lot size of 200 units for each replenishment order the optimal order quantity? If it is not, what is the optimal order quantity?

5.         How much annual savings would the manager make by ordering in lots of optimal order quantity compared to the lots of 200?

Answer 1

Economic Order Quantity refers to the number of unit the company should add to the inventory and the order is made to minimize the total inventory cost. The assumptions of EOQ are: -

• There is no constraint on lot size
• holding cost and ordering cost
• demand is independent
• Lead time is certain

Date D = 1000 cinta. /nnet -or 12000, Year 6M Cast = $50 20 500 100 = $100/unit/yeast 9: 200 uits 9 12000 200 =| 60 homes Ausuer 2 Annual ca女 12000 4000 200 2 200x 100o 2 910000

Bge of 200 unts is net ohmel L0D z 979:11 or 1980 units suverx 2 T C 2000 43919:59 $91419.59 49000 62 50,000 = 250.000-91919.59 152,020 4