Problem 7-9 Ergonomics Inc. sels ergonomically designed office chairs. The compa
ID: 328642 • Letter: P
Question
Problem 7-9 Ergonomics Inc. sels ergonomically designed office chairs. The company has the folowing informaton: Average demand2 Average demand 22 units per day Awerage lead time-31 days Item unit cost $51 for orders of less than 210 units Item unt cost $47 for orders of 210 urits or more Inventory carrying costs 20% The business year is 250 days Assume there is no uncerainty at all about the demand or the lead time. a. Calculate ??? if unit oasts$51 and $47. (Note: These E0Qs do not need to be feasible in ther price range.) (Round up your answers to the next whole number.) arge) (Round up your Unit cost at $47 b. Calculate annual ordering costs for each atemative? (Round your answers to 2 decimal places Unit oost at $51 Unit cost st 547 c. Calculate annual inventory carrying costs for each alternative? (Round your answers to 2 decimal places.) answers to 2 Unit cost at $51 Unit oost at $47Explanation / Answer
(a)
EOQ = (2.D.S/H)1/2
D = annual demand = 22 x 250 = 5500
S = ordering cost = $26
H1 = carrying cost per unit per annum for $51 price = 51 x 20% = $10.2
H2 = carrying cost per unit per annum for $47 price = 47 x 20% = $9.4
So, EOQ1 = SQRT(2*5500*26/10.2) = 167; EOQ2 = SQRT(2*5500*26/9.4) = 174 (infeasible as it is < 210)
(b)
Ordering Cost = (D/Q)*S
Ordering Cost1 = (5500/167)*26 = $856.29
Ordering Cost2 = (5500/210)*26 = $680.95 (note that Q and EOQ are different due to infeasibilltity)
(c)
Inventory carrying cost = H*(Q/2)
Carrying Cost1 = 10.2*(167/2) = $851.70
Carrying Cost2 = 9.4*(210/2) = $987.00 (note that Q and EOQ are different due to infeasibilltity)
(d)
Product cost = Price x Demand
Product Cost1 = $51 x 5500 = $280,500
Product Cost2 = $47 x 5500 = $258,500
(e)
Total cost = ordering cost + carrying cost + product cost
Total Cost1 = $856.29 + $851.7 + $280,500 = $282,207.99
Total Cost2 = $680.95+ $987.00 + $258,500 = $260,167.95
(f)
The best option is to order 210 chairs.
(g)
Savings = Total Cost1 - Total Cost2 = $282,207.99 - $260,167.95? = $22,040.04