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# Calculating EOQ and total inventory cost in the given case

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Ergonomics Inc. sells ergonomically designed office chairs. The company has the following information:
-Average demand 20 units per day
-Average lead time  30 days
-Item unit cost  \$50 for orders of less than 200 units
-Item unit cost  \$48 for orders of 200 units or more
-Ordering cost  \$25
-Inventory carrying cost  25%
-The business year is 250 days

The basic question: How many chairs should the firm order each time? Assume there is no uncertainty at all about the demand or the lead time. There are many associated questions, such as what will the firm's average inventory be under each alternative? What will be the breakdown of costs for each alternative?

#### Solution Preview

D =Total demand= 250*20=5000 units per year
S = ordering cost=\$25 per order

Case-1 Unit cost is \$50 (ordered quantity is less than 200 units)

P = Item purchase price = \$50.00 per unit
H=Holding cost per year=25% of \$50=\$12.50
EOQ=(2DS/H)^0.5=(2*5000*25/12.50)^0.5=141.4214 or 141 units

Case-2 Unit cost is \$48 (ordered quantity is 200 or more)
P = Item ...

#### Solution Summary

The solution depicts the steps to estimate the economic order quantity in a case where quantity discounts are provided. How many chairs a firm should order each time are determined.

\$2.19

## Apply the appropriate operations tools to aid in decision-making and optimize performance.

Calculate the EOQ/ELS for the following two cases. Include your full calculations:

Raw Material LRM:

Annual demand has historically been about 15,000 units. Each unit costs about \$40. For the annual report, due out in June, the corporate accounting department calculates inventory-holding costs by multiplying the value of each item by 0.40. The Director of Purchasing told you that his "cost of ordering" is about \$82 per order. He is currently ordering 1,000 at a time. How large should the standard order size be for this product? How much are the Purchasing Director's policies costing your company? (Calculate the ordering and holding costs associated with his policies and compare them to the "optimal" ordering and holding costs.)

Finished Product CLM:

Annual demand has historically been about 5,700 units. The sales price for each unit of CLM is about \$48. The production line that produces CLM can make 100 units per day, but it currently has 170 days per year devoted to manufacturing another project-assume 250 total production days per year. The setup cost for product CLM averages \$500 per setup. How large should the production runs be for CLM?

All I need is to show a 1 page calculation of each. There is no additional information I have to offer.

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