Problem 7-9 Ergonomics Inc. sells ergonomically designed office chairs. The comp
ID: 361318 • Letter: P
Question
Problem 7-9 Ergonomics Inc. sells ergonomically designed office chairs. The company has the following information: Average demand 35 units per day Average lead time = 49 days tem unit cost $69 for orders of less than 390 units Item unit cost $65 for orders of 390 units or more Ordering cost $44 Inventory carrying cost = 20% The business year is 250 days Assume there is no uncertainty at all about the demand or the lead time. a. Calculate EOQ if unit cost is $69 and $65. (Note: These EOQs do not need to be feasible in their price range.) (Round up your answers to the next whole number.) EOQ 237 units 244 units Unit cost at $69 Unit cost at $65 b. Calculate annual ordering costs for each alternative? (Round your answers to 2 decimal places.) Annual Ordering Cost Unit cost at $69 1,624.47 Unit cost at $65Explanation / Answer
Average demand = 35 units per day
Number of business days in a year = 250 days
Annual demand (D) = 35 units x 250 days = 8750 units
Ordering cost (S) = $44
Holding cost (H) = 20%
a) If the unit cost is $69, holding cost(H) = 20% of $69 = $13.8
EOQ = sqrt of (2DS / H)
= sqrt of [(2 x 8750 x 44) / 13.8]
= 237 units
If unit cost is $65, holding cost (H) = 20% of $65 = $13
EOQ = sqrt of (2DS /H)
= sqrt of [(2 x 8750 x 44) / 13]
= 244 units
b) For unit cost of $69,Annual Ordering cost = (D /EOQ) S
= (8750/237)44
= $1624.47
For unit cost of $65,Annual Ordering cost = (D /EOQ) S
= (8750 / 244)44
= $1577.87
c) For unit cost of $69,Annual carrying cost = (EOQ/2)H
= (237 / 2)13.8
= $1635.3
For unit cost of $65,Annual carrying cost = (EOQ /2)H
= (244 / 2)13
= $1586
d) For unit cost of $69,Annual product cost = D x unit cost
= 8750 x $69
= $603750
For unit cost of $65,Annual product cost = D x unit cost
= 8750 x $65
= $568750
e) For unit cost of $69,
Total cost = Ordering cost + carrying cost + product cost
= $1624.47 + $1635.3 + $603750
= $607009.77
For unit cost of $65,
Total cost = Ordering cost + carrying cost + product cost
= $1577.87 + $1586 + $568750
= $571913.87
f) They should order 244 chairs at a time as it has a lower total cost than the other alternative.
g) Annual savings = Total cost with unit cost of $69-Total cost with unit cost of $65
= $607009.77 - $571913.87
= $35095.9