CMW, a custom metalwork shop, makes a variety of products from three basic input
ID: 450658 • Letter: C
Question
CMW, a custom metalwork shop, makes a variety of products from three basic inputs bar stock, sheet metal, and rivets which are purchased in bars, sheets, and kits (boxes of 100), respectively. Projected use and cost of these raw materials for the upcoming year are as follows: The shop estimates that issuing a purchase order for any type of material costs $100 and uses an interest rate of 15 percent to calculate holding costs. Assuming steady use throughout the year, estimate the purchasing plus holding costs if all products are purchased four times per year. What happens to cost if we purchase each product 12 times per year? What are the "optimal" order frequencies if we use the EOQ model separately for each product? How many total purchase orders must be placed under this policy? Use the EOQ model to compute order quantities for each part and adjust the fixed cost of placing an order until the average order frequency is 12 times per year. How does the holding cost compare to that in part (a) where all parts are ordered 12 times per year?Explanation / Answer
Answer: Part Use Cost Total cost Bar stock 120 $40 $4,800 Steel 400 $20 $8,000 Rivets 1000 $0.50 $500 Total cost = $13,300 Average inventory cost = $8.75 Given that ordering cost = $100 and Holding cost = 15% of Inventory cost Therefore Holding cost = $1.31 per unit Total demand = 1000 units If the order is placed 4 times a year then the number of units bought at a time = 250 Therefore for one time purchase : Holding cost = $328.13 and ordering cost = $400 Therefore total cost = $728.13 If the order is placed 12 times a year then the number of units bought at a time = 83.33333 Therefore for one time purchase : Holding cost = $109.38 and ordering cost = $1,200 Therefore total cost = $1,309.38 NOW the EOQ = 390.3600292 So the number of orders = 2.561738 ordering cost = $ 256.17 and holding cost = $512.35 Total cost = $ 768.52