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Calculating EOQ, ROP, ordering cost and inventory cost

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Ross White's machine shop uses 2,500 brackets during the course of a year, and this usage is relatively constant throughout the year. These brackets are purchased from a supplier 100 miles away for $15 each, and the lead time is 2 days. The holding cost per bracket per year is $1.50 (or 10% of the unit cost) and the ordering cost per order is $18.75.

There are 250 working days per year.

(a) What is the EOQ?
(b) Given the EOQ, what is the average inventory? What is the annual inventory holding cost?
(c) In minimizing cost, how many orders would be made each year? What would be the annual ordering cost?
(d) Given the EOQ, what is the total annual inventory cost (including purchase cost)?
(e) What is the time between orders?
(f) What is the ROP?

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Solution Preview

(a) What is the EOQ?
D =Total demand= 2500 units per year
S = ordering cost=$18.75 per order
H = holding costs=$1.50 per unit per year
P = Item purchase price = $15.00 per unit
EOQ=(2DS/H)^0.5=(2*2500*18.75/1.5)^0.5=250 units

(b) Given the EOQ, what is the average inventory? What is the annual inventory holding cost?
Average ...

Solution Summary

Solution describes the steps to calculate EOQ, ROP, ordering cost and inventory cost.

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Calculating EOQ, ROP and Inventory Costs in the Given Case

Lakeland Company produces lawn mowers and purchases 18,000 units of a rotor blade part each year at a cost of $60 per unit. Lakeland requires a 15% annual rate of return on investment. In addition, the relevant carrying cost (for insurance, materials handling, breakage, and so on) is $6 per unit per year. The relevant ordering cost per purchase order is $150.

Required
1. Calculate Lakeland's EOQ for the rotor blade part.
2. Calculate Lakeland's annual relevant ordering costs for the EOQ calculated in requirement 1.
3. Calculate Lakeland's annual relevant carrying costs for the EOQ calculated in requirement 1.
4. Assume that demand is uniform throughout the year and known with certainty so that there is no need for safety stocks. The purchase-order lead time is half a month. Calculate Lakeland's reorder point for the rotor blade part.

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