Question

Hats R Cool, Inc. manufactures specialty hats which require a variety of materials (denim, ribbon, and mesh). Calculate the order point per material based on the following information:

a) The company has an expected daily usage of 75 yards of denim and mesh (each). The supplier requires a 3 day lead time for orders. The mandatory safety stock is 175 yards for denim and 200 yards for mesh.

b) The company has an expected daily usage of 20 yards of ribbon. The supplier requires 11 day lead time for orders due to its unique nature. The mandatory safety stock is 500 yards of ribbon.

Lawnman mower-chines manufactures lawnmowers for residential and commercial use. The mowers have a patented gear technology which requires more gears than normal mowers but uses less gas and is environmentally friendly. The company seems to alternate between carrying too much inventory and paying too much for each order due to size. Use the EOQ formula to help the company determine the appropriate ordering size based on the following:

a) Number of gears required annually 12,000 Cost of placing an order $15.00 Annual carrying cost per gear of inventory $0.50

b) Number of gears required annually 15,000 Cost of placing an order $12.50 Annual carrying cost per gear of inventory $0.70

c) Number of gears required annually 18,500 Cost of placing an order $11.00 Annual carrying cost per gear of inventory $0.95

Answer 1

Question 1st.

Solution : Order point or reorder point for each material can be computed as follows:

Order point for denim = Daily usage × Lead time + Safety stock

= 75×3 + 175

= 225 + 175 = 400 Yards

Order point for mesh = 75×3 + 200 = 425 Yards

Order point for ribbon = 20×11 + 500 = 720 Yards

Question 2nd.

Solution: Formula for economic order size using EOQ is :   

  

EOQ = /2/Annual usage in units)(Order cost) Annual carying cost per unit)

a). Ordering size (EOQ) = [(2×12,000×$15) / $0.50 ]^1/2

= 848.5281

= 849 gears (rounded off)

b). Ordering size (EOQ) = [(2×15,000×$12.5) / $0.70 ]^1/2

= 731.9251

= 732 gears (rounded off)

c). Ordering size (EOQ) = [(2×18,500×$11) / $0.95 ]^1/2

= 654.5388

= 655 gears (rounded off)

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