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Inventory management

This problem entails knowing Inventory Control Subject to known demand. Based out of the book Production and Operations Analysis-5th edition ISBN 0072865385 which is almost Identical to 4th ed.

A local machine shop buys hex nuts and molly screws from the same supplier. The hex nuts cost 15 cents each and the molly screws cost 38 cents each. A setup cost of $100.00 is assumed for all orders. This includes the cost of tracking and receiving the orders. Holding costs are based on a 25% annual interest rate. The shop uses an average of 20,000 hex nuts and 14,000molly screws annually.

I need help to:

A- Determine the optimal size of the orders of hex nuts and molly screws, and the optimal time between placement of orders of these two items.

B--If both items are ordered and received simultaneously, the setup cost of $100.00 applies to the combined order. Compare the average annual cost of holding and setup if these items are ordered separately; if they are both ordered when the hex nuts would normally be ordered; and if they are both ordered when the molly screws would be normally ordered.

Solution Preview

Hi,

Please see response to your posting as follows.

Annual usage/demand for Hex nuts, A1 = 20,000
Cost per unit for Hex nuts, P1 = $0.15
Ordering cost, S = $100 per order
Holding cost rate, c = 25% per annum
Inventory carrying cost, I1 = price per unit*holding cost rate = $0.15*25% = $0.0375 per unit per annum.

Annual usage/demand for Molly screws, A2 = 14,000
Cost per unit for Hex nuts, P1 = $0.38
Ordering cost, S = $100 per order
Holding cost rate, c = 25% per annum
Inventory carrying cost, I2 = price per unit*holding cost rate = $0.38*25% = $0.095 per unit per annum.

Step 1 - Find EOQ for the two items assuming they are ordered seperately.
EOQ for Hex nuts is
Economic order quantity, EOQ = SQRT (2*A1*S/I1), SQRT - Square root
EOQ = SQRT(2*20,000*$100/$0.0375) = 10327.95 ~ 10328 units
Average inventory = EOQ/2 = 10328/2 = ...

Solution Summary

Solution contains calculations of :
1. EOQ
2.Carrying cost.
3. Ordering cost.
4. the optimal time between placement of orders .

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