The Salesworthy Sprokets company purchase a sprocket flange used in the manufacture of aircraft door hinges directly from the supplier. Salesworthy's hinge production line, which is operated at a constant rate, will require 1,000 flanges per month throughout the year (....12,000 per year). if the administrative cost of placing and receiving an order is $ 25 per order, if the flanges cost $ 2.50 each, and if the per annum inventory holding charge is 20% based on average levels:
a) What is the EOQ for this component; and what is the total annual inventory ordering and carrying cost for the year? ( EOQ=1096; TC=$547.72; OC=$ 273.72; CC=$ 274.00). Please show all work.
b) Supposed the problem is changed such that yearly demand is now $ 10,000 worth of sealing gook (.... in 1 gallon cans, priced at wholesale), instead of the 520 cans per month. From this new data, recalculate the EOQ and the total cost equations.
Item A step-by-step guide.
Annual inventory of flanges= 12,000 per year
Cost of Placing an order= $25
Price of flange= $2.50
Percentage of carrying cost= 20%
EOQ= SQUARE ROOT OF ( Annual Inventory) (Cost per order) /(Price Per unit) (% of carrying)
EOQ= SQUARE ROOT OF 2 ( 12000) (25) /(2.50) (.20)
EOQ= SQUARE ROOT OF 600000 / .5
EOQ= SQUARE ROOT OF 1200000
EOQ= 1095.445 rounded off to 1,096 units
Note: This means that Sprokets company must order 1095.445 (say 1,096)units of flange per ordering ...
The solution shows how to compute for economic order quantity to determine the optimal ordering frequency and volume.