Question

Southeastern Bell stocks a certain switch connector at its central warehouse for supplying field service offices. The yearly demand for these connectors is 15,800 units. Southeastern estimates its annual holding cost for this item to be $24 per unit. The cost to place and process an order from the supplier is $76. The company operates 300 days per year, and the lead time to receive an order from the supplier is 2 working days. a) What is the economic order quantity? | units (round your response to the nearest whole number). b) What are the annual holding costs? $ (round your response to the nearest whole number). c) What are the annual ordering costs? $ (round your response to the nearest whole number). d) What is the reorder point? / units (round your response to the nearest whole number).

Answer 1

Solution:

(a) Economic Order Quantity (EOQ):

EOQ = SQRT [(2 x D x Co) / H]

where,

D = Annual demand

Co = Ordering cost

H = Holding cost

Putting the given values in the above formula,

EOQ = SQRT [(2 x 15,800 x $76) / $24]

EOQ = 316.33 or 316 (Rounding off to the nearest whole number)

Economic Order Quantity = 316 units

(b) Annual holding costs:

Annual holding costs = (Economic Order Quantity / 2) x Holding cost

Annual holding costs = (316 / 2) x $24

Annual holding costs = $3792

(c) Annual ordering costs:

Annual ordering costs = (Annual demand / EOQ) x Ordering cost

Annual ordering costs = (15,800 / 316) x $76

Annual ordering costs = $3800

(d) Reorder point:

Reorder point = Daily Demand x Lead time

Daily demand = Annual demand / Number of working days

Daily demand = 15,800 / 300 = 52.67

Reorder point = 52.67 x 2 = 105.34 or 105 (Rounding off to the nearest whole number)

Reorder point = 105 units