Master Hatter\'s demand for hats is 4000 per year. The order cost is $25 and the
ID: 452369 • Letter: M
Question
Master Hatter's demand for hats is 4000 per year. The order cost is $25 and the carrying cost is 15% of the price paid to the supplier. The cost paid to supplier is $12 per unit.
a. Compute the Economic Order Quantity.
b. The supplier has indicated that Master Hatter can have a price of $11 per hat if he orders at least 500. How many hats should Master Hatter order to minimize inventory management cost?
c. Assuming that the average daily demand is 200 hats with a standard deviation of 10. Master Hatter desires a customer service level of 95% (Statistical Z score of 1.64). Supplier lead time is 3 days. What is the reorder point?
d. Based on the data in part c, what is the average lead time demand?
e. Based on the data in part c, what is the safety stock amount?
Explanation / Answer
a)
Annual demand = 4000
Order Cost = $ 25
Carrying Cost = 0.15
Price = $ 12
EOQ = Sqrt((2 * Annual Demand * Order Cost) / (carrying Cost * price))
EOQ = Sqrt ((2 * 4000 * 25) / (0.15 * 12)) = 333.33
b)
Annual Cost at EOQ = (4000 * 12) + ((4000/333)*25) + ((333/2)*0.15*12) = $ 48600
Annual Cost at (Q = 500) = (4000*11) + ((4000/500)*25) + ((500/2)*0.15*12) = $ 44650
As the annual cost is low, Master hatter should order 500 units to minimize the cost.
c)
Reorder Point = Lead time Demand + Safety stock = (200 * 3) + (1.64*10*Sqrt(3)) = 628.4056
d)
Lead time Demand = Daily Demand * Lead time = 200 * 3 = 600
e)
Safety Stock = z * Standard Deviation * Sqrt(Lead Time) = 1.64 * 10 * Sqrt(3) = 28.4056