Exercise 3

Economic Order Quantity

For each of the following independent cases, use the equation method to compute the economic order quantity.

Case A Case B Case C

Annual requirement (in units) 13,230 1,681 560

Cost per order $250 $40 $10

Annual holding cost per unit 6 20 7

Exercise 4

Lead Time and Safety Stock

Andrew and Fulton, Inc. uses 780 tons of a chemical bonding agent each year. Monthly demand fluctuates between 50 and 80 tons. The lead time for each order is one month, and the economic order quantity is 130 tons.

1. Determine the safety stock appropriate for the chemical bonding agent.

2. At what order point, in terms of tons remaining in inventory, should Andrew and Fulton, Inc. order the bonding agent?

Exercise 5

Economic Order Quantity Equation Approach; JIT Purchasing

Fiber Technology, Inc. manufactures glass fibers used in the communications industry. The company s materials and parts manager is currently revising the inventory policy for XL-20, one of the chemicals used in the production process. The chemical is purchased in 10 pound canisters for $95 each. The firm uses 4,800 canisters per year. The controller estimates that it costs $150 to place and receive a typical order of XL-20. The annual cost of storing XL-20 is $4 per canister.

1. Write the formula for the total annual cost of ordering and storing XL-20.

2. Use the EOQ formula to determine the optimal order quantity.

3. What is the total annual cost of ordering and storing XL-20 at the economic order quantity?

4. How many orders will be placed per year?

5. Fiber Technology s controller Jay Turnbull, recently attended a seminar on JIT purchasing. Afterward he analyzed the cost of storing XL-20 including the cost of wasted space and inefficiency. He was shocked when he concluded that the real annual holding cost was $19.20 per canister. Turnbull then met with Doug Kaplan, Fiber Technology s purchasing manager. Together they contacted Reno Industries, the supplier of XL-20, about a JIT purchasing arrangement. After some discussion and negotiation, Kaplan concluded that the cost of placing an order for XL-20 could be reduced to just $20. Using these new cost estimates, Turnbull computed the new EOQ for XL-20.

a. Use the equation approach to compute the new EOQ.

b. How many orders will be placed per year?