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economic order quantity & production lot model

A variety of criteria and techniques can be used to determine how many units of a product to purchase or produce and what parameters to set for inventory management. In this task, apply the economic order quantity model and the economic production lot model to related decisions.

Company A's uniform demand over their year comes out at 19,000 units/yr. The cost of ordering all these stands at $39/order. The yearly cost of holding and shipping these can be expressed as a rate: 27% of the inventory value. Each unit of inventory has a per-unit price of $11.

Company B's demand is uniform throughout the year and totals 17,000 units per year. The production setup costs total $79 per setup. The annual holding cost rate is 29% of the value of the inventory. The per-unit cost of finished product is $20. The production rate is constant and equivalent to 65,000 units per year.


Write a response in which you:

A. Determine the size of the order for Company A in the situation provided above which could minimize the total annual cost via use of the economic order quantity model.

B. Determine the lot size for Company B in the given scenario that would minimize total annual cost by using the economic production lot size model.

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Solution Preview

Per unit cost, c = $11
Let us assume order quantity = Q
Annual demand quantity, D= 19000 units/year
Fixed cost/order, K = $39/order
Annual holding cost, h = 27% of inventory cost == 0.27*11 = $2.97/unit

Total cost comprises of three components:
Total cost (TC) = Purchase cost (PC) + Ordering cost(OC) + Holding cost (HC)
PC = purchase price*demand = c*D
OC = demand*(cost/order)/(quantity/order) = /D*K/Q
HC = (holding ...

Solution Summary

Using economic order model and economic lot model, minimum annual costs for two companies, one of which holds inventory and the other which has production, are estimated