Question

Abey Kuruvilla, of Parkside Plumbing, uses 1,200 of a certain spare part that costs $25 for each order, with an annual holding cost of $25 a) Calculate the total cost for order sizes of 25, 40, 50, 60, and 100 (round your responses to two decimal places). Total Cost (S) Order Size 25 40 50 60 100

b) Identify the economic order quanitity and consider the implications for making an error in calculating economic order quanitity.

Answer 1

(a)

Annual Demand = D = 1200/year

Ordering Cost = C_o = $25

Holding Cost = C_c = $25/year

Order Size = Q

Annual Inventory Holding cost = average inventory * unit carrying cost = (Q/2)*C_c

Annual Order cost = Number of orders * cost/order = (D/Q) C_o

Total Annual Cost = Annual Inventory Holding Cost + Annual Order Cost = (Q/2)*C_c + (D/Q) C_o

When Q = 25, Total Annual Cost = (25/2)*25 + (1200/25)*25 = $1512.5

When Q = 40, Total Annual Cost = (40/2)*25 + (1200/40)*25 = $1250

When Q = 50, Total Annual Cost = (50/2)*25 + (1200/50)*25 = $1225

When Q = 60, Total Annual Cost = (60/2)*25 + (1200/60)*25 = $1250

When Q = 100, Total Annual Cost = (100/2)*25 + (1200/100)*25 = $1550

(b) Economic Order Quantity Q* = √(2DC_o/C_c) = √(2*1200*25/25) = 49