Question

Presented is a practice problem with the final answers and a formula sheet. I need somebody to explain how to go through the problem.

Practice Problem Set #5 The store manager of Dollar Tree has reviewed the inventory policy of placing orders for its frozen food items. He found this ordering policy resulted in total annual setup cost and carrying costs of $7,698 and S3,833, respectively Based on the provided data, can you tell whether the company is using the FOQ policy or not? If not, what actions should be taken by the manager in order to reduce the annual total inventory costs (i.e., the sum of total setup and carrying costs for the year)? Answer: Reduce setup, which leads to placing order less ofien; increase inventory carrying which leads to ordering more units in each order Equation Sheet Project Scheduling Slack = LS-ES-LF-EF b-a E-+4m+b T-E Inventory Management 2DS DSp_ +CD Special property: When order size is Q units, total annual setup costs total annual carrying costs

Answer 1

The company is not using EOQ for ordering because in the case of EOQ, the annual set up and carrying costs would be equal. But here the annual setup cost = $7698 and annual carrying cost = $3833.

This means that the setup costs should be reduced to order economically by keeping the total inventory costs to minimum.

Annual Setup cost = S(D/Q) where S is the setup cost, Q is the order quantity and D is the annual demand.

From the equation we can see that setup cost is inversely proportional to Q. Hence setup cost can be reduced by increasing the ordering quantity. When more quantity is ordered each time, the orders need to be placed less often.

Annual carrying cost = (Q/2)H where H is the holding cost per unit.

Hence it is directly proportional to Q and when we increase the order quantity, carrying costs will increase.

At economic order quantity, Q = $\sqrt{\frac{2DS}{H}}$

The manager should order the quantity obtained by using this equation and make both the costs equal to reduce the total annual inventory cost while using EOQ policy.