CPC Inc. is setting up an inventory plan for its PS100 power supply assembly uni
ID: 360532 • Letter: C
Question
CPC Inc. is setting up an inventory plan for its PS100 power supply assembly unit which has a purchase price of $13.95. Ordering cost is $100, while its annual cost of carrying inventory is estimated at 40% of the price. CPC is forecasting 2400 units will be sold annually. Once an order is placed, it is received in 20 working days. There are 240 working days per year.
a) What is the optimal (economic) order quantity?
b) What is the annual ordering cost?
c) What is the annual carrying cost?
d) What is the total annual cost of this plan?
e) What is the duration of a cycle (in days)?
f) How many orders are placed per year, on average?
g) What is the reorder point?
h) What is the reorder point if lead time is 40 days?
Explanation / Answer
a) Optimal Order Quantity = Square Root of 2FD/C
Variables: F= Fixed Cost Per Order
D= Annual Demand
C= Carrying Cost Per unit per year
Here F=100$; D=2400 units;C= 13.95* 0.4= 5.58;
Therefore Optimal Economic Order of Quantity= Squarte Root of (2*2400*100)/(5.58) = 293
b) Total Annual Ordering Cost = (Total Demand /EOQ) * Cost of Order
= (2400/293) * 100= 819 .11 $
c) Total Annual Carrying Cost= (Cost Per Unit* EOQ)/2
= (5.58*293)/2= 817.47$
d) Total Annual Cost= Total Annual Carrying Cost + Total Annual Ordering Cost= (817.47) + (819.11)= 1636.48$