Question 15 pts Inventory policies based on finding the economic order quantity
ID: 424388 • Letter: Q
Question
Question 15 pts
Inventory policies based on finding the economic order quantity (EOQ) are a compelling because they:
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Question 25 pts
Currently, the operation orders ____ crates at a time.
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Question 35 pts
The EOQ for crates is approximately:
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Question 45 pts
The total annual cost of the EOQ policy is about ____ the current policy.
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Question 55 pts
The reorder point for the EOQ policy is approximately:
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Question 65 pts
Compared to the existing policy, the EOQ policy would require ordering more often.
Provide an exact amount to order. You've recently been hired as a project manager at a distributor of fruits and vegetables located in Northern Kentucky. An operations manager has asked for your help in analyzing current inventory policies related to packing crates. She's looking for a lower cost policy Currently, the operation buys crates from a regional supplier. The operation uses 1500 crates each month. Annual carrying cost is 18% of the $6 acquisition cost per crate. Each order costs approximaely $40. Crate supplier lead time is 5 days. Currently, the operation orders crates every two months. You've been asked to develop a lower cost alternative to the existing crate inventory policyExplanation / Answer
Answers
Question 15 pts
Inventory policies based on finding the economic order quantity (EOQ) are a compelling because they:
Minimize total costs related to ordering and holding inventory.
Question 25 pts
Currently, the operation orders ____ crates at a time.
3,000
Question 35 pts
The EOQ for crates is approximately:
1,155
Question 45 pts
The total annual cost of the EOQ policy is about ____ the current policy.
about $613 lower than
Question 55 pts
The reorder point for the EOQ policy is approximately:
250 crates
Question 65 pts
Compared to the existing policy, the EOQ policy would require ordering more often.
True
EXPALANATION
Purchase price per unit, p = $6
Ordering cost per order, O= $40
Carrying cost per year per unit, C = $ 6 * 0.18 = $1.08
Annual Demand, d = 1500 *12 =18000 units
Lead time = 5 days
15.
EOQ aims to balance ordering and holding costs, thuis trying to minimize the total inventory costs
25.
The distributor orders every two months- fixed period. So the inventory management is periodic review model
Order quantity = Average demand during re-order period = 2*1500 =3000
35.
Optimal order quantity, E.O.Q
= SQRT(2 × Annual demand × Cost Per Order / Carrying Cost per unit per year)
= SQRT(2*18000*(40/1.08))
=1154.74
EOQ=1155 units (approximately )
45
Current policy
Avg. Inventory being carried at any point
= (Beginning inventory + Ending inventory)/2 or Order quantity/2
=3000/2
=1500
Number of orders per year
= annual demand/ Order quantity
=18000/3000
=6
Total costs
= ordering cost+ holding (carrying) costs
= (Number of orders per year * ordering costs per order) + (Avg. Inventory being carried at any point * Carrying cost per unit per year )
=(6* 40)+(1500*1.08)
= $1860
EOQ policy
Avg. Inventory being carried at any point
= Order quantity/2
=1155/2
Number of orders per year
= annual demand/ Order quantity
=18000/1155
Total costs
= ordering cost+ holding (carrying) costs
= (Number of orders per year * ordering costs per order) + (Avg. Inventory being carried at any point * Carrying cost per unit per year )
=(18000/1155 *40) +( 1155/2 *1.08)
=1247.077
Difference= $1860 -1247.077 = $612.92
EOQ policy leads to $613 lower than current policy
55.
In continuous review system , when led time and demand are constant, re-order pint is equal to lead time demand
Re order point = lead time in days * demand per day
= 5 * 1500/30=250 crates
65.
Number of orders per year = annual demand / order quantity = 18000/1155= 15.58 orders
Hence it is true that Compared to the existing policy, the EOQ policy would require ordering more often.