Problem 1: Economic Order Quantity (10 points) Annual demand for iPhones at the
ID: 2574111 • Letter: P
Question
Problem 1: Economic Order Quantity (10 points) Annual demand for iPhones at the Verizon store is 5,000 units. Lead time to receive an order is 14 days. Placing an order costs $200 and the cost to hold one unit in inventory is $800/year. Since demand and lead time are both variable, the manager requires the store to hold a safety stock of 250 iPhones. The next order should be placed when inventory drops to what amount? (assume 365 days in one year for converting annual demand to daily demand. Be sure to round up.) (2 points) What is the economic order quantity? (2 points) How many orders will be placed each year? (2 points) What is the total holding cost for the year? (2 points) What is the total ordering cost for the year? (2 points) a) b) c) d) e)Explanation / Answer
a) Re-order level = Average daily use x lead time + Safety stock
THEREFORE re order level = 5000/365 x 14 + 250 =441 units
b) EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)
therefore, EOQ=SQRT(2 x 5000 x 200/800)= 50 units
c) 50 units each order, 100 orders to meet annual demand.
d) Total holding cost = $800 x $ 250=$20000
e) total ordering cost = 100 orders x 200 = $20000