Question

(2) Cress Electronic Products manufactures components used in the automotive industry. Cress purchases parts for use in its manufacturing operation from a variety of different suppliers. One particular supplier provides a part where the assumptions of the EOQ model are realistic. The annual demand is 7500 units, the ordering cost is $40 per order, and the annual holding cost rate is 35%.

a. Assume 350 days of operation per year. Cress Electronics wants a 97.5% service level. If the lead time for an order is 8 days and the standard deviation of daily demand is 3, what is the reorder point with safety stock?

b. The supplier has informed Cress that it can offer the following quantity discounts

Quantity	Price
1-499	$30
500-1499	$28
1500 and above	$27

Based on this information in what quantity should Crest choose when making orders?

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. It maintain a balance between ordering costs and carrying costs. Reorder point is the level of inventory which the firm holds in stock and when the inventory level reach this point, the firm must reorder the item.

EOQ act as a review inventory system to monitor the inventory level continuously and once the level reaches the reorder point, a fixed quantity of order is placed. Thus EOQ helps in calculating reorder point and optimal reorder quantity to avoid shortage of inventory.