Cress Electronic Products manufactures components used in the automotive industry. Cress purchases parts for use in its manufacturing operation of different suppliers. One particular supplier provides a part where the assumptions of the EOQ model are realistic. The annual demand is 5000 units, the ordering costs is $80.00 per order, and the annual holding costs rate is 25%. 1. If the cost of the part is $20 per unit, what is the economic order quantity? 2. Assume 250 days of operation per year. If the lead time for an order is 12 days, what is the reorder point? 3. If the lead time for the part is seven weeks (35 days), what is the reorder point? 4. What is the reorder points for part (c ) if the reorder point is expressed in terms of the inventory on hand rather than the inventory position.
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To calculate the answers to these questions, we need to understand and use the Economic Order Quantity (EOQ) model. The EOQ model helps determine the optimal order quantity and reorder point for inventory management. Let's go through each question step by step:
1. To calculate the economic order quantity (EOQ), we need the following information:
- Annual demand: 5000 units
- Ordering cost: $80.00 per order
- Annual holding cost rate: 25%
- Cost of the part: $20 per unit
The formula to calculate EOQ is:
EOQ = sqrt((2 * Demand * Ordering Cost) / Holding Cost per Unit)
Substituting the given values, we get:
EOQ = sqrt((2 * 5000 * 80) / (0.25 * 20))
Simplifying this equation, we find:
EOQ = sqrt(400000 / 5) = sqrt(80000) = 282.84
Therefore, the economic order quantity for this part is approximately 283 units.
2. To calculate the reorder point, we need the following information:
- Annual demand: 5000 units
- Lead time: 12 days
- Days of operation per year: 250
The formula to calculate the reorder point is:
Reorder Point = (Demand / Days of operation per year) * Lead Time
Substituting the given values, we find:
Reorder Point = (5000 / 250) * 12 = 200 units
Therefore, the reorder point for this part, assuming 250 days of operation per year and a 12-day lead time, is 200 units.
3. To calculate the reorder point with a lead time of seven weeks (35 days), we use the same formula as in the previous question:
Reorder Point = (Demand / Days of operation per year) * Lead Time
Substituting the given values, we get:
Reorder Point = (5000 / 250) * 35 = 700 units
Therefore, the reorder point for this part, assuming 250 days of operation per year and a 35-day lead time, is 700 units.
4. If the reorder point is expressed in terms of the inventory on hand rather than the inventory position, we need to consider both the demand during the lead time and the existing inventory. The formula to calculate the reorder point in this case is:
Reorder Point = Demand during lead time + Safety Stock
However, since the details for calculating the safety stock are not provided in the question, we cannot determine the exact reorder point in this case without additional information.
Remember, these calculations are based on assumptions and models for inventory management. Actual situations may vary, and it's important to consider specific factors and adjustments relevant to a particular business or industry.