Please Answer within 30 minutes as my assignment is timed! 1Freedom Safe makes a
ID: 369330 • Letter: P
Question
Please Answer within 30 minutes as my assignment is timed!
1Freedom Safe makes a variety of safes for home use. Many parts in their bills of materials (BOMs) are standard items that can be used across a number of products. For example, one dial is used on a number of safes.
In recent months the company has been implementing JIT and Lean principles in order to reduce costs and improve quality. One such initiative has led to a VMI (vendor managed inventory) agreement with its dial supplier, thus reducing Freedom Safe's ordering costs from $25 to $3.50. Annual demand for this dial is 30,000 units. Annual holding costs are $1.25 per dial.
a.Based on this information, what will be the new optimal order quantity for dials (using the reduced ordering cost)? (Display your answer to two decimal places.)
b.When using the reduced ordering cost, as compared to the original ordering cost, how many dials on average will Freedom Safe hold in inventory (assuming they hold no safety stock)? Display your answer to two decimal places.)
c.What will be the annual total combined savings to ordering costs and holding costs when using the reduced order cost, as compared to the original ordering cost? (Display your answer to two decimal places.)
Explanation / Answer
A.
Optimal order quantity = (2*annual demand * ordering cost/annual holding cost)^.5
Optimal order quantity = (2*30000*3.5/1.25)^.5
Optimal order quantity = 409.88 units
B.
Average number of dials in the inventory = optimal order quantity /2 = 409.88/2
Average number of dials in the inventory = 204.94 units
C.
Total cost (at reduced ordering cost) = Annual ordering cost + annual holding cost
Total cost (at reduced ordering cost) = (30000/409.88)*3.5 + (409.88/2)*1.25
Total cost (at reduced ordering cost) = $512.35
With old ordering cost of $25
Optimal order quantity = (2*annual demand * ordering cost/annual holding cost)^.5
Optimal order quantity = (2*30000*25/1.25)^.5
Optimal order quantity = 1095.45 units
Total cost (at ordering cost of $25) = Annual ordering cost + annual holding cost
Total cost (at ordering cost of $25) = (30000/1095.45)*25 + (1095.45 /2)*1.25
Total cost (at ordering cost of $25) = $1369.31
Now
Net savings in cost = Total cost (at ordering cost of $25) - Total cost (at reduced ordering cost)
Net savings in cost = 1369.31 - 512.35
Net savings in cost = 856.96